When It Comes To Jobs, Not All Small Businesses Make It Big
Wednesday, October 9, 2013
Part of a series about small businesses in America
When it comes to job creation, politicians talk about small businesses as the engines of the U.S. economy. It's been a familiar refrain among politicians from both major parties for years.
But it obscures the economic reality. It makes a nice slogan, but it's not really accurate to say that small businesses produce most of the nation's new jobs, says John Haltiwanger, an economics professor at the University of Maryland.
"I'm kind of tired of people saying that," says Haltiwanger. "To be fair, there is an element of truth to it, and I think the element of truth is quite different than I think what often people have in mind when they hear or actually make that statement."
What most people imagine are mom-and-pop shops -- the dry cleaner or coffee shop. But Erik Hurst, an economist at the Chicago Booth School of Business, says that's not where you'll find the job creation. He points to his neighborhood coffee shop.
"The coffee shop has had probably six, seven employees the whole time it's been there. It's a great coffee, provides a service. When you ask them what they want to do, they say they want to be a coffee shop. When you ask them: Do you want to grow big? They say no. Do you want to innovate? They say no; I want to sell coffee," Hurst says.
As a result, based on surveys and jobs data, he says that most small businesses "don't grow and don't innovate in any real way." But, Hurst says, some do, and they are responsible for most of the job creation.
"A handful of those will start small and grow into being something rather big," he says. "But those are a fraction of all the small businesses that start."
'Not Just A Restaurant'
Economists say such job growth is all about new firms -- startups -- but not all of them. Most startups will actually fail. The second most likely outcome is that they'll start small and stay small. Just a tiny fraction start small and then grow fast, creating an outsize share of new jobs. One such company is Sweetgreen, which dishes out fast, fresh organic salads in compostable bowls at 20 locations on the East Coast.
Pedro Ceron manages the restaurant near Capitol Hill. He's worked for the company for a little more than a year and is one of about 570 people now employed by Sweetgreen. Six years ago, it was just a little shack of a shop in D.C.'s Georgetown neighborhood, says co-founder Nicolas Jammet.
"It was 560 square feet, and most people told us that you couldn't open a restaurant in that space or that size. But we were college seniors, and we wanted to do it; so we did it," Jammet says.
At first, there were only about 10 employees, and Jammet says the founders worked all day, every day to make it a success. "Washing dishes, ringing up salads, making salad. In the early days, we were elbow deep in salad," Jammet says.
Two years later, they opened their second and third stores, in larger spaces, hiring more employees. They brought on an executive team and more locations followed. Another founder, Nathaniel Ru, says that was always the plan.
"For us, we really approached the business not as a restaurant business, but more as a startup. We wanted to create a company and a bigger business, not just a restaurant," Ru says.
Researchers say there are fast-growing businesses like this one in just about every segment you can imagine, from haircutting to high tech. But, Haltiwanger, of the University of Maryland, says government programs often aren't aimed at these companies.
"Targeting small businesses overall is probably mistargeting," he says.
He points to the Small Business Administration loan program, which he says helps firms based on their size rather than their age. "Their loan programs, I would say, would be better targeted towards young businesses than small businesses per se," Haltiwanger says.
Last year, the federal government backed $30 billion in loans to small businesses, and based on past years, it's safe to say the overwhelming majority of those loans went to existing businesses rather than startups. A few years ago, after it was already established, one of the businesses that benefited from that program was Sweetgreen.
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