Secrets of Growth

A bright spot for small businesses: Job creation

November 1, 2011: 10:15 AM ET

It's easy to blame the little guy for persistently high unemployment, but the reality is that many small businesses are actually hiring while big companies aren't.

FORTUNE – U.S. small businesses are often thought of as the engine of job creation. During the past decade, mom-and-pop shopkeepers, plumbers and the like created more than 60% of net private-sector jobs. So when the economy turned sour, it wasn't surprising that small businesses bore the brunt of the blame for high unemployment.

It's true that the little guys drove more of the drop in employment during the recession. They also held back on hiring during the early stages of the economic recovery. But today small firms are doing better than most think, according to a Capital Economics report.

Even though widely cited surveys suggest they continue having a gloomy picture of the economy, small businesses are actually hiring considerably more than big companies. Since last March, firms with 500 or fewer employees have added 60,000 jobs a month to private payroll employment "while large businesses have added nothing," says Paul Dales, an economist with Capital Economics, citing ADP employment surveys.

This comes as President Obama focuses on giving small business tax credits and other incentives in his $447 billion jobs plan. It also comes as the National Federation of Independent Businesses (NFIB) paints a bleak economic picture. The small employer lobbying group's latest optimism index showed that "September was another bad job creation month," with the percentage of small firms with one or more job openings dropping to 14% from 15% in August. What's more, such firms saw a 5% decline in employment during the last three months and haven't seen an increase in jobs since December 2007.

"Things are pretty bad but they're not as bad as some believe," Dales says.

It's not to say that small firms aren't struggling like the rest of us. Unemployment remains high. And the housing market continues to constrain consumers' spending power, giving small business owners (and big companies) less reason to hire more workers.

Indeed, they're not hiring like they used to. But why all the excess gloom?

It could be that perhaps the smallest firms are having a rougher go of it. Think of your neighborhood hardware store with 10 or fewer employees. The NFIB says such businesses make up more than half (70%) of members surveyed for its index. By contrast, the ADP, which generally labels small firms as those having fewer than 500 employees, is seeing job creation.

The differences highlight that even though small businesses are often clumped together by everyone from politicians to policymakers, their potential to hire, expand and innovate vary widely. This is something that researchers at the University of Chicago recently pointed out. Erik Hurst and Benjamin Wild Puglsey say most surviving small businesses aren't particularly innovative. Nor do they spend much on research and development. What's more, they tend not to grow "by any significant margin."

More to the point: It's the difference between the Jack Dorsey's of the world versus the owners of your corner convenient store. Whereas Dorsey's Twitter has grown to 600-plus employees since it was created in 2006, the corner store will likely stay the same size at least for many years.

We've seen this with tech-start-ups, which naturally start out small and are the few firms doing much hiring today. As my colleague Dan Primack pointed out earlier this year, a survey of executives of early-stage companies in the software, hardware, life sciences and cleantech sectors show that startup hiring is on the rise this year. According to Silicon Valley Bank, two-thirds of respondents said that overall business conditions have improved during the past year, and three-quarters expect things to get even better in the next 12 months.

And so Washington politicos and policymakers – many eager to lend small firms a helping hand – may want to look deeper at the array of businesses out there. After all, just because  they start off small doesn't mean they're created equal. And so they probably shouldn't be treated as such.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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