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How important is small business to the U.S. economy?

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Monthly Economic Review: May 2014

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The importance of small business to job creation and to the U.S. economy has been the focus of economists and policy makers alike for several decades. But defining or measuring what constitutes or defines a small business is quite challenging, and there is no universal agreement on the definition.  However, improved access to additional data allows for a more comprehensive look at the importance of small business. 

Definition aside, the U.S. Census Bureau’s Business Employment Dynamics (BED) tool provides economists and other insiders a behind-the-scenes view of the fluid nature of the labor market. 

While many believe that larger firms are the most important factor when it comes to driving economic growth, small businesses contribute more than their fair share. 

According to the Bureau of Labor and Statistics’ latest report, firms with 1-49 employees accounted for 40 percent of total net job growth in the third quarter of 2013, basically mirroring the 41 percent share that large firms with 500 or more employees contributed. (Net change in employment is the difference between the gross number of jobs gained and the gross number of jobs lost; see Table 1.)  

Percent of Total Net Job Growth 3Q 2010 - 3Q 2013 By Size

As you’ll see in the table, of the 7.9 million net new jobs created between the second quarter of 2010 and the third quarter of 2013, firms with 1-49 employees contributed 30 percent of net job growth; the largest firms with 500 or more employees contributed only slightly more with 39 percent. 

Small businesses are the largest retail employers in the U.S. economy, and while measuring employment by business size is no easy task, statistical agencies begin at the establishment level -- that is, a factory or a store that produces goods or services. “Establishments” are typically physical locations and are engaged in one, or predominantly one, type of economic activity.  A firm, or a company, is a business and may consist of one or more establishments. The Quarterly Census of Employment and Wages produced by the Bureau of Labor Statistics provides a solid measuring stick for looking at business size analysis.

As you’ll see in the table, establishments with 1-49 employees make up half of the employment market in retail.  


Percent of 2013 Retail Employment by Establishment Size

Percent of 2013 Retail Employment by Establishment Size

These small businesses -- be it a local florist, jeweler or an independent community drug store -- are an important source of employment and economic activity and serve as the foundation of their communities.

You cannot overlook the role of small businesses if you want to understand the current state of the U.S. economy. Never underestimate their power; small business owners are entrepreneurs and innovators, and, most importantly, support the vitality of our communities.