New Businesses Will Create Jobs

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As the recovery from the Great Recession unfolds, it is apparent that once again employment will be one of the last areas to show significant improvement. Where will increased employment come from? The Kauffman Foundation, a large foundation devoted to entrepreneurship, gives one possible answer to this question. It has conducted extensive surveys which show that business startups inject new energy into the economy by acquiring new knowledge and technologies, creating new jobs, and providing new goods and services. Clearly, the success and vitality of these small but mighty firms are critically important to a robust economic recovery.

Historically, small businesses (defined by the Small Business Administration as an independent business having fewer than 500 employees) have served as a strong force for job creation. As a group, they employ about half of the current employees. Yet, they create 65 percent of all new jobs according to the estimates of the U.S. Bureau of Labor Statistics (BLS). More than 99 percent of the 27 million firms in the U.S. are small businesses, most of which are run by single proprietor. Approximately 6 million of these small businesses are firms that hire employees in addition to the owner. Each year about 600,000 of these employer firms are created in the U.S.

There now is some evidence that small businesses may have an even larger impact than indicated by the BLS. Ying Lowrey, an economist with the SBA has found that many startup companies and their entrepreneurial self-employed proprietors aren’t counted in official tallies. She estimates that, from 1997 to 2008, there were 2.5 million new jobs were created in this manner and went uncounted by the BLS. This indicates that the role of small businesses is even higher than the 65 percent cited above.

During a recession the number of firms that close increases and business births go down. For example, when the economy was strong in 2005, there was an increase of 80,000 new businesses, 645,000 births and 565,000 closures. During the recession in 2009, there were about 550,000 business births and 660,000 closures or a net loss of 110,000. Using the Cincinnati Regional USA Chamber’s benchmark of 11 other metropolitan areas, the Economics Center found that Cincinnati has slightly less than our share of small business firms; however it has about the same share as other metro cities in the tri-state area. Denver, Colorado and Austin, Texas lead the benchmark group for the largest share.

For our policy makers, an important question seems to be: how can we affect the growth and sustainability of small businesses in Cincinnati? Many organizations are addressing this question by helping owners (or potential owners) to create strong business plans, to obtain skill training and to better understand finances, budgeting, networking and long term needs such as succession planning. Other factors affecting small businesses include federal regulation and available financing. The average annual cost per employee of meeting federal regulations is estimated at $7,755 for larger firms, yet for firms with fewer than 20 employees, the cost rises to $10,585 per worker. Finding financing also has been a real problem. For start-ups it is an uphill battle; banks, which are trying to improve the quality of their loan portfolio, are often reducing their loans and are reticent to take on the needs of start-ups.

Can we overcome barriers to growth and provide a more business friendly environment that will drive sustainable small business growth in our area? To what extent would this create employment growth and a more vibrant economy? Better knowledge of the factors that limit this growth could serve as the basis for actions that would achieve these goals.