Tuesday, October 25, 2011

What May be the Most Commonly Misunderstood Fact About the Job Market

What May be the Most Commonly Misunderstood Fact About the Job Market "So, summing up, small businesses, say those with 100 workers or less, account for a minority of both workers and payrolls, and are not the primary engine of job growth."


"Why then all the favoritism in policy circles...In part, because they need and deserve help. Larger firms have fewer credit and cash flow challenges, nor do they operate on such tight margins. It’s easier for larger firms to sell into and expand foreign markets, which is especially useful to them right now, as that’s where the growth is."


Ken Flowers said...

You have be be careful with a chart like this. Histograms are very difficult to get right. First, the bin sizes are all different, but notably, the last bin is huge (and unbounded) compared to the others. As a chart to compare size of large and small it is just fine, though. As a chart for growth, it lacks something. Particularly given the oddity that when a small company grows, it moves into a new bin. The value at any given time doesn't say anything about growth.

Howard said...

I suppose, though for example, I don't see a need that the bin sizes be the same, that's not the way company sizes are compared. I'm not sure the last bin is huge. Sure 500+ is unbounded but it's still representing just 15% of the businesses and showing they have 50% of the employees.

Some real numbers here would be nice as we don't know how many businesses there are compared to how many employees (which I think is ~150 million). Fortunately he linked to his data which is a table with more granularity. It's still a snapshot but he also linked to a previous article about startups which have in previous recoveries been responsible for a lot of job growth.

(Turns out there are 121 million private employees and I think the other ~30 million are public sector).

Richard said...

Ken has a good point about the chart, which is why I replotted it to emphasize the point at my blog. I feel that separating the bars, like in the original chart, doesn't allow for the comparison intended. The confusion is also related to number averages vs. weighted averages. Yes, there are a lot of businesses with a few employees, but you are mostly likely to be employed (if you are) at a business with 500 or more employees. I also created a chart with the added bins breaking up the businesses above 500 into more bins like in the census data to address the questions about the large 500 and up bin.

As to growth, while companies grow and move up the bins, many, dare I say most, small companies fail and leave the chart completely.

When the republicans use this as a talking point and say that we need to eliminate regulation to allow small business to flourish and that is where the jobs will come from, I completely disagree. One - the reason people are not hiring is because of a lack of demand for their products or services not some fantastical notion that regulation is costing them or that regulation is even a main factor in their decision making. Two - looks like from these charts that most jobs are at large businesses anyway.

Howard said...

I do like your chart better. I do point out that there are some common definitions for small medium and large businesses. In fact they have some legal ramifications (some regulations apply to only some sizes of businesses. Wikipedia lists some international definitions. The US regulations are a bit more complicated as they vary by industry and include other factors such as revenue etc. You can find more from the US Small Business Administration here.

I think the most common usage is small is under 100, medium is 100-499, and large is over 500. Richard's chart makes it easier to see that by those terms, small accounts for about 30% of employees (about the same as those firms over 10,000). Certainly significant but not necessarily the driving force behind jobs or recovery. I'd be curious to see some data on which firms lost the most jobs in the recession.