Recent Studies on Small Business and Job Creation

A recent study commissioned by the Small Business Administration (SBA) reinforces previous studies that small businesses create very few jobs. Its author, researcher L. Spencer Tracy presents conclusions on who actually create jobs in the economy. With unemployment rampant in Puerto Rico, this should be evaluated by the government to determine whether incentives and other initiatives need to be redirected.

For many years,  the government has emphasized  self-employment and the creation of new businesses as strategies to reduce unemployment and reactivate the economy. It also has emphasized strengthening small business because according to studies, small businesses are those that generate the most jobs in the economy.

It is important to distinguish between maintaining jobs and creating new ones. For example, SMEs bear most of the jobs in Puerto Rico and it is important to keep them healthy. However, this does not mean they are creating or will create new jobs. The same applies to large companies. For example, a politician said recently that “SMEs should be the cornerstone upon which it builds an economic policy because the provide the most jobs.”  It turns out that jobs are created by high-growth firm of no particular size.

In Puerto Rico, statistics support this finding.  For example, in 2008, growing businesses created 142.990 jobs. New enterprises in the same period generated only 36.708 jobs.  Results are similar for 2009  (135,473/29,044) and 2010 (135,473/29,044).

Despite these numbers,  the government (mostly federal)  spends  millions of dollars and invests in countless programs  to train and support new entrepreneurs.  Although this type of funding has spawned an entire consulting  industry aimed at this market, the results are disappointing. Statistics of the Planning Board show that  in July 1999 Puerto Rico had 151.000 self-employed workers. By July 2011 the amount was less-149.000. These figures fluctuate from month to month but there is no real increase for 12 years.

High-growth firms  have a disproportionate role in the creation of jobs. These may be small medium or large. What distinguishes them is that they are growing organizations whose sales have doubled at least for a period of four years and have an employment growth quantifier of two or more during the same period. According to the researcher, these firms are younger and more productive than all other companies and are in relatively equal in all sectors, including declining and stagnant.

According to the study of the SBA, there are, on average, about 350,000 high-impact companies in the U.S. This represents 6.3 percent of all firms in the economy. These are companies that generate all net jobs in the economy and job creation capacity is largely immune to the expansion and contraction cycle. From 1994 to 2008, the U.S. economy lost about 16.3 million jobs had it not been for the contribution of high-impact companies. During the period of analysis, these companies created about 10.7 million jobs while all other created only 4.1 million. The study notes that had it not been for these high-impact firms, the EU economy had lost 16.3 million jobs from 1994 to 2003.