Small Business Growth Lags Behind Overall Economy

Conventional wisdom says that small businesses increasingly struggle in today’s economy. We have compared how smaller businesses have fared versus larger firms over time, and find at least some evidence to support that conventional wisdom. In terms of employment and sales, small firms have not kept pace with overall economic growth. These results hold up across many industries and geographies.

The graphs below report annual data from the U.S. Census Bureau on employment and sales from firms in four size categories: 0-19, 20-99, 100-499 and over 500 employees, respectively. The data demonstrate that growth in employment and sales are disproportionately concentrated among larger firms.

The first graph shows growth in employment for each size category, with all four pegged to 100 in the base year, 1978. Employment by firms in the largest category grew by 81 percent between 1978 and 2012, while employment in the smallest category grew only 37 percent. It is interesting to note that employment in the smallest category kept pace with the rest of the economy until the late 1980s, when its relative growth began to slow.

The Census reports data on sales receipts every five years dating back to 1992, allowing us to look at measures of efficiency such as revenue per employee. The second graph shows changes in this metric, adjusted for inflation. Revenue per employee also increased at greater rates for firms in larger size categories, growing by almost 50 percent for firms with 500 or more employees, and by only 8 percent for firms in the smallest category.

We find that these differences by firm size are especially pronounced for retail firms, with both measures above essentially flat-lining for retailers with 0-19 employees. This evidence is consistent with the familiar story of “mom and pop” stores struggling to compete with Walmart and other big box retailers. The results are also remarkably consistent geographically, with employment growth for the largest category exceeding that of the smallest in all 50 states.

These results tell only part of the story. We are currently looking at factors that drive the success of small businesses across different industries and regions, in order to turn our research into actionable advice for business owners. Look for more on this topic soon in this space, as well as an upcoming AIER research brief.