Sunday, August 31, 2008

Small businesses thrive in the US labor market

The Bureau of Labor Statistic’s (BLS) employment report is released on Friday. Economists and policy makers are rife with anxiety because the report is difficult to forecast, and more often than not, a surprise.

Another report, the ADP employment report, is released the Tuesday before the BLS employment report. The ADP reports on total private employment, excluding government workers, and is said to be a good predictor of the BLS report; however recently, the ADP report has overestimated the growth in private employment by about 100,000 jobs per month. The report has essentially been written off by market traders as having any predictive power for the BLS report, but trends in the ADP report are interesting.

This chart illustrates the shares of the ADP payroll by firm size: Small (1-49 employees), medium (50-499 employees), and large (>499 employees). Since 2000, the share of small firms (44% in July) in the total private payroll has been growing relative to large (16.5%) and medium (39.3%) firms. The share of large firms fell 2.5% since 2000. The share of medium firms remains relatively unchanged. Times are a changing, and so is firm size. According to the SurePayroll survey – an online payroll service for small businesses – the top 5 states best for a small business are Utah, Maryland, Nevada, Colorado, and Arizona. I can relate. My family used to live in Colorado, where it seemed that everybody had a car or van with their business logo written on its side.

So, why have smaller firms thrived and overshadowed the large firms? E-commerce and the falling cost of computers have played a large part.

This chart illustrates the relationship between the falling cost of computers and related equipment and the share of small firms in the total ADP survey spanning the years 2000 to 2008. There is a strong and positive correlation: As the cost of computers falls, the share of small firms rises. Specifically, for each 1% annual reduction in the cost of computers, the share of small firms rises by 0.1%. For such a simple model, the significance is rather large (R2 = 0.75). PC prices, especially, have fallen so dramatically that starting a business and getting up and running has is extremely affordable.

Most of you work for small or medium size firms. Me, I am the exception because I work at a large firm. Come November, issues related to firm size will likely emerge – especially with health care. According to SurePayroll, 56% of small businesses do not offer health care coverage to employees. Obama is pushing for tax breaks to small firms who offer health care coverage, but is that really the best way to go?

I tend to side with McCain’s plan, offering consumer tax credits for insurance coverage (on a sliding scale, of course, set according to age and predisposed health conditions). Small firms are already at a disadvantage in their bargaining powers with insurance companies, and the tax break would likely need to be sizeable to compensate. Going to the consumer level, as McCain suggests, would create more competition in the health care industry and cost the government less money. What do you think?

Please leave your comments. Best, Rebecca Wilder


  1. As people get laid off or forced into retirement (a common occurrence these days), they have trouble finding a replacement job. so, why not start up that small company you've been thinking about for years? As you say, computers are cheap. On top of that, there are more companies catering to the small business owner. I was involved in setting up a coffee house 2 years ago and we turned to a local bank to do all of the payroll. What a money saver! Also started to use it for the non-profit for which I worked. We found other inexpensive alternatives. Credit card transactions are handled by RBS, a multi-national, because they offered this killer deal for coffee houses. Even setting up corporations or other entities is so much easier on the federal and sometimes the state side. Ergo, more small companies.

  2. I agree with the unreliability of the ADP job report (

    As far as biz sizes go, isn't it just easier to own a small company? As you expand, things tend to get more complicated. Yet, on the other hand, small biz have soooo much less income than larger companies, so health care, especially dental, is increasingly expensive, and often eliminated, especially during tough times -- I speak from experience.

  3. Hi Tim,

    Good point - easier to manage a smaller business, at the floor level and at the executive level. Also, barriers to entry for small businesses are likely lower. That is probably due to the nature of small businesses theses days, service oriented (as you point out) rather than goods oriented.

    It will be interesting to see if the share of large businesses will rise with the oncoming surge in manufacturing, stemming from strong US export growth. In manufacturing there are large barriers to entry with high fixed costs, and firm size tends to be large.