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The Backbone of the Economy: Small Business Job Growth and GDP Contribution

Small Business Job Growth and GDP Contribution: A Comprehensive Look

Small businesses are often known as the backbone of the economy, and for a good reason. Hundreds of thousands of small businesses in America employ tens of millions of people and contribute billions of dollars to the Gross Domestic Product (GDP) every year.

In this article, we take a comprehensive look at the importance of small businesses, factors affecting their job growth and GDP contribution, and the context of the numbers.

Small Business Job Growth

Small businesses are the engines of net new job creation in the US. In 2021 alone, small firms created around 1.2 million jobs, which accounted for almost all new job growth during the period.

Small businesses with less than 20 workers made up over half of all job-producing firms. Tax allowances, accessibility to innovation hubs, and funding are some factors that improve the chance for small businesses to grow and create jobs.

Americans identified small businesses as essential to the economy and supported lawmakers’ initiatives to provide COVID-19 relief. However, there is conflicting data on how small businesses fare in job creation.

A report from the Kauffman Foundation suggests that older businesses tend to create fewer jobs than younger firms, with most job generators being young firms. In contrast, a study by American Express and Dun & Bradstreet indicates that relatively new small businesses tend to lag in employment growth compared to longstanding small businesses.

These findings suggest that the impact of small businesses on job creation depends on the specific circumstances. Another factor that significantly affects job growth of small businesses is the “stickiness” of jobs per firm size.

Studies show that job-churners, or small businesses that experience both hiring and firing, have a greater impact on the economy than lay-off machines. This is because the job-churners create more net job openings than lay-off machines, which implies that small businesses’ net job creation rate is positively correlated with its gross job creation rate.

Small Business GDP Contribution

While small businesses contribute significantly to the GDP, their share of the GDP has been declining over the years. From 1998 to 2014, small businesses’ percentage of the GDP fell from 48% to 43%.

Despite this decline, small businesses had created between 64% and 70% of net new jobs over the same timespan. The context of the numbers is essential when analyzing small businesses’ share of the GDP.

For instance, the US Small Business Administration (USSBA) states that new businesses are a significant driver of GDP growth in the economy. New businesses create more jobs than failing businesses or businesses in decline, which means that successful startups can contribute to the GDP but perhaps not directly or for a few years.

Therefore, attention should not only be given to small businesses already in existence but also to new startups that can fuel future job growth and further raise the small business GDP. Startups are essential to the small business GDP equation because they generate gross job creation.

Gross job creation is a term used to describe the percentage of new jobs over a given period, including both new establishments and expanding ones. It is a better gauge of long-term economic growth than net job creation, which only counts new jobs created by new and expanding establishments, subtracting job losses from closed and contracting establishments.

Startups create more gross jobs than firms that are already in business, implying that they are more significant in creating lasting jobs and fostering economic growth.

Conclusion

Small businesses play an essential role in the US economy, providing jobs for millions of Americans and contributing billions of dollars to the GDP. Factors that improve small business growth and job creation include tax allowances, funding, and accessibility to innovation hubs.

Net job creation by small businesses depends on the “stickiness” of the jobs created, and older businesses tend to create more jobs than younger firms. When analyzing small business GDP, the decline in GDP share is contextualized when considering new businesses’ contribution to future GDP growth.

Startups are an essential driver of long-term economic growth and contribute to gross job creation, making them critical in fostering economic growth.

Survival of Small Businesses

Small businesses contribute significantly to job creation and the economy, but their survival rates are often a concern. According to the US Small Business Administration (USSBA), small businesses’ ten-year survival rate stands at around 66%.

The ten-year survival rate is a commonly used metric since a company that survives such a period is likely to continue operating in the long-term. While the failure rate of small businesses may appear high, several benefits come with starting a small business.

Small business owners have the freedom to be their bosses and the potential to earn higher wages, especially if their business is successful. Moreover, availability of credit is a critical factor impacting small business success.

The more credit that is available, the better the chances of small businesses surviving past the ten-year mark. Despite the benefits of starting small businesses, data shows that many small businesses still struggle to keep their doors open.

Many factors contribute to the high failure rates of small businesses. Some of these include a lack of access to affordable financing, competition from larger firms and online retailers, and unfavorable economic conditions.

While small businesses often benefit from preferential tax treatment, large outside firms may receive better incentives and support, or push out local firms.

Statistical Reality

Small businesses are crucial for promoting competition and sustaining economic growth. They often provide specialized goods and services that larger firms cannot offer.

Small, local businesses help circulate money within communities and foster the development of local economies, serving as a refutation to the idea that the death of small businesses simply reflects the sector’s natural and inevitable change. Research has indicated that local businesses significantly impact the local economy, generating more revenue per square foot of commercial space than large chain stores.

In addition, local businesses enhance innovation through increased market diversity. Innovation resulting from small and medium-sized businesses is a significant driver of market growth and economic activity.

The promotion of local and small business sustainability cannot be achieved solely by government policy. Individuals’ and communities’ active support in such initiatives can make a significant contribution.

Several initiatives encourage the public to support small, locally-owned businesses. For instance, ‘Small Business Saturday,’ a campaign backed by American Express, highlights the value of shopping small/local businesses during peak holiday shopping periods.

Such campaigns help create awareness and pull individuals’ attention towards value addition in smaller, locally-based companies, preventing the sector’s growth and sustained development.

Perception of Small Businesses

Small businesses are often the focus of debates on job creation and other economic factors. Despite their importance, small businesses continue to suffer from an enduring myth that they are not significant providers of employment.

This myth is mainly rooted in the widely held belief that large companies create most jobs. The myth’s persistence is reflected in a famous quote by former US President Ronald Reagan: “Small business is the backbone of America.” The perception that small businesses are vital to the American economy’s success is often associated with other values such as freedom, opportunity, and community.

In a study by David Birch, it showed that small businesses with fewer than 100 employees generated more than half of all jobs between 1978 and 1982. The study paved the way for a greater understanding of the contribution of small businesses in job creation, as opposed to the perception that labor growth lay only in large firms.

However, the myth endured, and the media continues to paint a picture of corporate America as the primary breadwinner in American job creation. Small businesses remain a crucial part of the American way of life and economy, whose success contributes significantly to national identity.

They provide opportunities for entrepreneurship, innovation, and unique offerings. As more research highlights the critical role of small businesses in the larger economy, the American psyche is poised to change towards small-is-successful, a welcome movement away from the myths and biases that have stifled growth in the sector.

In conclusion, small businesses play a crucial role in the US economy, with their contribution and significance far surpassing their often-perceived limitations. Awareness and support for local and small businesses are central to ensuring their growth and overall sustainability.

With greater appreciation for the value of small businesses, the American economy, the backbone of small businesses, will only soar higher. The article focused on the importance of small businesses and covered topics on small business job growth, GDP contribution, survival rates, statistical reality, and perception.

Small businesses are the backbone of the economy, providing jobs for millions of Americans and contributing billions of dollars to the GDP. However, their ten-year survival rate is often a concern, mainly due to factors such as competition from larger firms and unfavorable economic conditions.

Despite the challenges, small businesses are crucial for promoting competition and sustaining economic growth, and fostering the development of local economies. In conclusion, the article highlights the significance of small businesses and emphasizes the need for greater awareness and support for local and small businesses.

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