Importance of Small Businesses to the U.S. Economy

Read this section to learn more about the importance of small businesses to the US economy.

Job Creation

The majority of U.S. workers first entered the business world working for small businesses. Today, half of all U.S. adults either are self-employed or work for businesses with fewer than five hundred employees. Although the split between those working in small companies and those working in big companies is about even, small firms hire more frequently and fire more frequently than do big companies. Why is this true? At any given point in time, lots of small companies are started and some expand. These small companies need workers and so hiring takes place. But the survival and expansion rates for small firms is poor, and so, again at any given point in time, many small businesses close or contract and workers lose their jobs. Fortunately, over time more jobs are added by small firms than are taken away, which results in a net increase in the number of workers. Table 5.1 "Small Firm Job Gains and Losses, 1993–2008 (in millions of jobs)" reports the net increase in jobs generated by small firms for the fifteen-year period of 1993 to 2008 and breaks it down into job gains from openings and expansions and job losses from closings and contractions.

Table 5.1 Small Firm Job Gains and Losses, 1993–2008 (in millions of jobs)

  Job Gains From Job Losses From
Net Change Openings Expansions Closings Contractions
         
20.7 105.2 398.3 97.7 385.1
         

The size of the net increase in the number of workers for any given year depends on a number of factors, with the economy being at the top of the list. A strong economy encourages individuals to start small businesses and expand existing small companies, which adds to the workforce. A weak economy does just the opposite: discourages start-ups and expansions, which decreases the workforce through layoffs. Table 5.1 "Small Firm Job Gains and Losses, 1993–2008 (in millions of jobs)" reports the job gains from start-ups and expansions and job losses from business closings and contractions.