Do Small Businesses Create Most Jobs? Not Exactly

This is one of those cases where it depends how you slice the data.

Specifically, it depends on whether you are counting firms or establishments.

Economist Jared Bernstein explains in a recent article here. In brief, smaller firms created fewer jobs than their percentage of the labor force and large firms (above 500 employees) created more new jobs than their percentage of the labor force.

The Bureau of Labor Statistics explains the difference between a firm and an establishment:

"An establishment is defined as an economic unit that produces goods or services, usually at a single physical location, and engaged in one or predominantly one activity. A firm is a legal business, either corporate or otherwise, and may consist of one establishment, a few establishments, or even a very large number of establishments. [Bernstein bold]"

The difference may seem subtle, but the statistical difference is substantial. It should become clear by reading the article.

Another issue that I surmise has an effect on the statistical outcome, but that Bernstein doesn't examine has to do with outsourcing. For tax and accounting reasons, many large firms in recent decades have decided to let direct employees go and hire contract firms to do the same work.

In many instances, the small contract business is formed for the specific purpose of hiring former employees of the large firm and continuing to do the same work at the same location. In such a case, there really are no new jobs, though it may appear that the new small business has created new jobs for its new employees. It is really sleight of hand.