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Supporting Small Businesses Pays Off for Jobs

Politicians, aiming to increase employment rates for their constituents, ought to be concerned with policies supportive of small businesses rather than large corporations.

The number of employees in small to medium sized businesses doubled from 2003 to 2016. In developing countries such as Afghanistan and Ethiopia, small and medium sized enterprises (SMEs) make up more than half of total employment. In other countries in which the economies are becoming more established such as Mexico, SMEs account for one third of total employment. Prior to 2009, SMEs outperformed larger companies in terms of employment growth.

However, the success of SMEs has dwindled since the recession. Why is it that politicians are overlooking the opportunity to increase jobs through supporting local businesses? Could current policies be negatively affecting corporations or small to medium sized businesses?

This graph shows the number of full-time employees in SMEs as well as their share of the employment "market."
Source: Bloomberg

Written by Campbell and Margot

16 thoughts on “Supporting Small Businesses Pays Off for Jobs

  1. murrayc20

    Politicians may not be supporting local businesses simply because who they are as business people themselves. For example, Trump is a known huge corporation mogul. Because of his values and his support base, supporting small businesses may contradict his big business ideals. He is also more concentrated on "making america great again" through domestic industrialization-- not a small business type of deal. In addition, a study by the Kauffman Foundation found that most employers of small businesses are not interested in growing past a certain point; only 1 in 4 small business owners are interested in expansion, the rest are more interested in holding steady. Politicians would not want to invest in small businesses to create jobs if the owners of the small businesses do not want to grow.

  2. the prof

    Note there are very large differences in SME employment across economies. In the US 2 out of 3 jobs are in large firms; in Japan 2 out of 3 are in small. In poorer economies a large share of the population are still in farming or are migrants involved in petty trading. The challenge in such economies may be to create a framework to allow (larger) firms to grow, and shift employment both away from agriculture and to the formal sector.

  3. Ellie Bradach

    I think that politicians overlook small businesses because small business don't contribute as much to their campaign as big businesses. A politician cannot campaign on a national scale without the backing of an equally national company socially or economically. Although government policies might not be helping SMEs, fads of small, trendy businesses and "buying local" have expanding within the last 10 years encouraging SMEs to compete with big business.

  4. mizeo20

    Because this graph is observing 132 economies, it seems that we may need more data to make an accurate prediction as to why policymakers in the United States are not as focused on small businesses. If I had to guess, I would assume that large firms employ more individuals than small businesses due to our developed economy. Therefore it would make sense that policymakers focus on corporate tax breaks for these large firms. Furthermore, even if this is not the case, policymakers are going to focus more on the firms that are lobbying on Capitol Hill and pumping millions of dollars into their campaigns rather than the traditional mom and pop stores who contribute very little if nothing towards lobbying efforts.

  5. richardsonw20

    Politicians need support from large corporations to fund campaigns. Small businesses may be beneficial to economics, they don't offer much to politicians aside from, maybe, a boost in the publics view of them. While small businesses and buying local seem to be huge right now, I envision this trend to slowly fade away with time. Eventually, if the small businesses are successful, the larger corporations with see this as an opportunity to profit and buy them out.

    1. bashamc20

      Strong point... I would be very interested in researching further into the level that small business donate to politicians and their superPACs compared to the rate of similar donations from larger businesses. I rarely thought about the dichotomy between small vs. large business regrading political donations. I think you're spot on and inadvertently bring up and interesting question- does the lobbying power of large businesses shut out small businesses from the discussion?

  6. Ruofan Shen

    Politicians have chosen to support more large corporations because they have larger impact on taxation compared to SMEs. I also agreed that SMEs do not contribute to the government as much to their campaign as big businesses. But supporting SMEs can be very beneficial to long-term growth of economy. For example, India has carried out a policy to support small and medium sizes business several years ago, which has achieved great boost in economy.

  7. laniere20

    I agree with this article in that it is important that we do not overlook the role that small business' play in employment as well as the economy. While large business have the power to serve a large part of the country all at once, small businesses have an advantage in that they are able to serve their customers on a more personas level as well as treat their employees as real people. During the Recession, it makes sense that small business were hit the most because they do not have the vast resources that large companies do, and so employment in small businesses dropped. In my opinion, politicians are focusing on larger corporations because those larger corporates reach more people, and therefore politicians feel as though they are helping the largest amount of people.

  8. andersons20

    In today's times, supporting small business is a popular narrative. When asked why, responses often entail "it's the right thing to do." However, politicians will look past the authenticity of small businesses and instead point to the growth, limited liability, and tax advantages corporations offer.

    The importance of small business cannot be refuted, but the loose definition of small business deteriorates the argument. Any business with fewer than 500 employees is considered a small business (99.7% of U.S. companies).The Great Recession has lead prospective workers to seek employment with large and stable companies, rather than small and inexperienced ones. In contrast, a 2015 study by the Kauffman Foundation suggests the focus should shift from the size of the business to the age of the business -- new businesses account for nearly all job creation in the U.S. Many argue that new firms bring competition and drive innovation to markets. New businesses, big or small, are making their case for the spotlight.

  9. Julia Moody

    It's possible that politicians are overlooking local businesses because investment-wise it's more profitable to support and invest in larger corporation-like businesses. From the graph pictured, it looks like full-time employees of small and medium sized companies has made up a significantly large portion of the employment market in recent years, even possibly returning to the 2003-04 levels. So, although these smaller companies lost some steam after the 2008 recession, which damaged growth across all areas of the economy, they have improved greatly over the last eight years and perhaps current government policies are helping rather than hurting them.

  10. Chris Vogel

    Politicians tend to push policies that will get them more votes for whatever position they are trying to obtain. In regards to the economic stimulation this will vary depending on the region/country because a politician in New York City will have different incentives than a politician in rural Kansas. Many countries with small and developing economies, will have a large proportion of their working population allotted to farming, while more advanced countries will have more specialization. Politicians could be overlooking opportunity to increase jobs through supporting local businesses because many don't want to expand. They may take on some more employees but many don't want to expand/franchise. Politicians are also financially supported by people. Those who tend to give a lot of money, also tend to have more influence over the politician. Therefore, since it is more likely wealthier business owners will give more money, it is also likely that these politicians will in return support them. Current policies could be negatively effecting SMEs by supporting large corporations and ultimately creating more intense competition with SMEs.

  11. gianakosa20

    I think this boils down to the selfish nature of politics. American politicians often campaign on behalf of small businesses, yet never actually promote their ability to produce stable jobs for Americans. Talk about supporting small businesses is popular for politicians, yet when it comes to actually supporting these businesses and looking to them for job opportunities, there is little action.

    Sure, it is hard to put on a national campaign for small businesses, as they obviously widely vary from community to community. But I think the real reason small businesses aren't emphasized by policy makers is their lack of financial influencing power. Politicians support those who give money to them. Politicians support large firms that give them political/financial support that will help them reach a position of more power. They support the wealthy people, who likely work for large firms. Small businesses, and small business owners, don't have the funding to do this.

  12. litvaka20

    Politicians are typically most concerned with securing the number of votes necessary to win an election. Therefore, politicians will tend to support policies that will allow them to garner the most support from their constituents. In many areas of the country and the world, small to medium size businesses are the primary employers of a particular place. The politicians from that district may be more likely to support policies that will help small business because it will help their constituents. On the other hand, politicians that have a large constituent base that work for a large corporation may be less likely to support policies that help small businesses rather than large corporations. However, as the graph shows, small businesses are increasing the number of people they employ throughout the world and therefore policies should help with this growth. I believe that once politicians see the necessity of these policies for their constituents, they will be far more likely to push for their implementation.

  13. the prof

    • are small businesses a reflection of the structure of the economy – agriculture? urbanization?

    • do they reflect labor market issues or tax issues? – in some countries labor law only applies to firms above a certain size, and certain taxes kick in above some threshold in revenue or employment

    • is this a function of policy? if so, what would favor small over large, and why would that be good?

    = that empirically lots of workers are employed in small firms gives no immediate reason to think that is desirable. it may be, but then we have to pin down the reasons, which may be true only in certain types of services and manufacturing. globally almost all farming is small-scale, outside of tropical plantation crops. personal services (barber shops) are often small everywhere. but so what?

  14. the prof

    Note that I have been listening to a book by Bhagwati and Panagariya on the Indian economy. Chapter 8 has a long section on the impact of labor legislation in specific and the "Permit Raj" more generally on business in India. Basically it's extremely costly to grow beyond 19 workers in size. So in the garment industry, a major employer in China, Vietnam, Indonesia and Bangladesh, India fares poorly. There are very few large firms, but almost no medium-sized firms (50-300 employees). So the problem there is not that small firms don't receive support – though they don't – it's the medium-sized labor-intensive firms don't receive support.

    Note: Bhagwati is a leading trade theory economist who was widely thought likely to share a Nobel prize with Krugman ... it didn't happen that way, but he has had a real and beneficial impact on economic policy in India, to the benefit of a billion people. It's not clear that Krugman has had much impact on economic policy in the US and Europe. Some leading Indian politicians listen to economists. The current Republican party, however, does not - the claims for the benefits of the tax "reform" Congress is currently considering are a travesty of illogic, false numbers and fallacious arguments.

    Note Deux: Economics is not a topic that works well as an audio book. Sentences replete with numbers and policy details are hard to follow when read aloud rather than read in black and white.

  15. smithg20

    First, I think it is important to note the struggle in defining small businesses in the United States’s economy. Even just a small business or small enterprises can encompass many businesses of various sizes and structures. This data represents both small and medium enterprises, which might give a deceiving picture to many on the influence of “small businesses”.

    In regard to small businesses’ impact on politicians, I think it is evident under the current political structure how small businesses are disadvantaged. The lobbying industry places great importance on large corporations, as the industry is driven by monetary goals. In order for small businesses to gain a greater voice, they need to actively organize themselves to advocate as a single body.

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