Business
12:47 am
Thu October 10, 2013

When It Comes To Jobs, Not All Small Businesses Make It Big

Originally published on Wed October 16, 2013 1:38 pm

Part of a series about small businesses in America

When it comes to job creation, politicians talk about small businesses as the engines of the U.S. economy. It's been a familiar refrain among politicians from both major parties for years.

But it obscures the economic reality. It makes a nice slogan, but it's not really accurate to say that small businesses produce most of the nation's new jobs, says John Haltiwanger, an economics professor at the University of Maryland.

"I'm kind of tired of people saying that," says Haltiwanger. "To be fair, there is an element of truth to it, and I think the element of truth is quite different than I think what often people have in mind when they hear or actually make that statement."

What most people imagine are mom-and-pop shops — the dry cleaner or coffee shop. But Erik Hurst, an economist at the Chicago Booth School of Business, says that's not where you'll find the job creation. He points to his neighborhood coffee shop.

"The coffee shop has had probably six, seven employees the whole time it's been there. It's a great coffee, provides a service. When you ask them what they want to do, they say they want to be a coffee shop. When you ask them: Do you want to grow big? They say no. Do you want to innovate? They say no; I want to sell coffee," Hurst says.

As a result, based on surveys and jobs data, he says that most small businesses "don't grow and don't innovate in any real way." But, Hurst says, some do, and they are responsible for most of the job creation.

"A handful of those will start small and grow into being something rather big," he says. "But those are a fraction of all the small businesses that start."

'Not Just A Restaurant'

Economists say such job growth is all about new firms — startups — but not all of them. Most startups will actually fail. The second most likely outcome is that they'll start small and stay small. Just a tiny fraction start small and then grow fast, creating an outsize share of new jobs. One such company is Sweetgreen, which dishes out fast, fresh organic salads in compostable bowls at 20 locations on the East Coast.

Pedro Ceron manages the restaurant near Capitol Hill. He's worked for the company for a little more than a year and is one of about 570 people now employed by Sweetgreen. Six years ago, it was just a little shack of a shop in D.C.'s Georgetown neighborhood, says co-founder Nicolas Jammet.

"It was 560 square feet, and most people told us that you couldn't open a restaurant in that space or that size. But we were college seniors, and we wanted to do it; so we did it," Jammet says.

At first, there were only about 10 employees, and Jammet says the founders worked all day, every day to make it a success. "Washing dishes, ringing up salads, making salad. In the early days, we were elbow deep in salad," Jammet says.

Two years later, they opened their second and third stores, in larger spaces, hiring more employees. They brought on an executive team and more locations followed. Another founder, Nathaniel Ru, says that was always the plan.

"For us, we really approached the business not as a restaurant business, but more as a startup. We wanted to create a company and a bigger business, not just a restaurant," Ru says.

Researchers say there are fast-growing businesses like this one in just about every segment you can imagine, from haircutting to high tech. But, Haltiwanger, of the University of Maryland, says government programs often aren't aimed at these companies.

"Targeting small businesses overall is probably mistargeting," he says.

He points to the Small Business Administration loan program, which he says helps firms based on their size rather than their age. "Their loan programs, I would say, would be better targeted towards young businesses than small businesses per se," Haltiwanger says.

Last year, the federal government backed $30 billion in loans to small businesses, and based on past years, it's safe to say the overwhelming majority of those loans went to existing businesses rather than startups. A few years ago, after it was already established, one of the businesses that benefited from that program was Sweetgreen.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

STEVE INSKEEP, HOST:

Often when politicians talk about job creation, they talk about small businesses.

(SOUNDBITE OF ARCHIVED RECORDING)

PRESIDENT BARACK OBAMA: Small businesses produce most of the new jobs in this country. They are the anchors of our Main Streets.

INSKEEP: That was President Barack Obama speaking in 2010, but it could have been any number of politicians, Democratic or Republican, any time in the last decade. What they're saying feels right but obscures a surprising reality. Researchers have found only a very small subset of those businesses truly are the engines of job creation.

NPR's Tamara Keith explains.

TAMARA KEITH, BYLINE: It makes a nice slogan, but John Haltiwanger says it's not really accurate to say that small businesses produce most of the nation's new jobs.

JOHN HALTIWANGER: I'm kind of tired of people saying that.

KEITH: Haltiwanger is a professor of Economics at the University of Maryland who studies job creation.

HALTIWANGER: To be fair, there is an element of truth to it. And I think the element of truth is quite different than I think what often people have in mind when they hear or actually make that statement.

KEITH: What most people imagine are your mom and pop business - the dry cleaner or the coffee shop. But Erik Hurst, an economist at the Chicago Booth School of Business, says that's not where you'll find the job creation. He points to his neighborhood coffee shop.

ERIK HURST: The coffee shop has had, like, probably six, seven employees the whole time it's been there. It's a great coffee, provides a service. When you ask them what they want to do, they say they want to be a coffee shop. When you say do you want to grow big, they say no. Do you want to innovate? They say no, I want to serve coffee.

KEITH: As a result, based on surveys and jobs data, he says...

HURST: Most small businesses don't grow and don't innovate in any real way.

KEITH: But Hurst says some do and they are responsible for most of the job creation.

HURST: A handful of those will start small and grow into being something rather big. But those are, you know, a fraction of all the small businesses that start.

KEITH: Economists say it's all about new firms, startups. Not all of them, though. Most startups will actually fail. The second most likely outcome is that they'll start small and stay small. Just a tiny fraction start small and then grow fast, creating an outsized share of new jobs. One such company is Sweetgreen, which dishes out fast, fresh organic salads in compostable bowls at 20 locations on the East Coast.

PEDRO CERON: Can I start with your salad?

UNIDENTIFIED MAN: Yeah. Can I get a chicken masala(ph).

CERON: Masala(ph)? Ma'am?

UNIDENTIFIED WOMAN: Can I get a Kale Caesar, please?

CERON: For here or to go?

KEITH: Pedro Ceron manages the restaurant near Capitol Hill.

CERON: Head coach, that's what they call it. Not a manager.

KEITH: He's worked for the company for a little more than a year and is one of about 570 people now employed by Sweetgreen. Six years ago it was just a little shack of a shop in D.C.'s Georgetown neighborhood, says co-founder Nicholas Jammet.

NICHOLAS JAMMET: It was 560 square feet and most people told us that you couldn't open a restaurant in that space or that size. But you know, we were college seniors and we wanted to do it so we did it.

KEITH: At first, there were only about 10 employees. And Jammet says the founders worked all day, every day to make it a success.

JAMMET: Washing dishes, ringing up - you know, ringing up salads, making salads, and you know, in the early days we were elbow deep in salad.

KEITH: Two years later they opened their second and third stores, in larger spaces, hiring more employees. They brought on an executive team and more locations followed. Another founder, Nathaniel Ru, says that was always the plan.

NATHANIEL RU: For us, we really approached the business not as a restaurant business but more as a startup. You know, we wanted to create a company and a bigger business, not just a restaurant.

KEITH: Researchers say there are fast-growing businesses like this one in just about every segment you can imagine - from hair cutting to high tech. But the University of Maryland's John Haltiwanger says government programs often aren't aimed at these companies.

HALTIWANGER: Targeting small businesses overall is probably mis-targeting.

KEITH: He points to the Small Business Administration loan program, which he says helps firms based on their size rather than their age.

HALTIWANGER: Their loan programs, I would say, would be better targeted towards young businesses than small businesses per se.

KEITH: Last year, the federal government backed $30 billion in loans to small businesses, and based on past years, it's safe to say the overwhelming majority of those loans went to existing businesses rather than startups. A few years ago, after it was already established, one of the businesses that benefitted from that program was Sweetgreen.

Tamara Keith, NPR News, Washington. Transcript provided by NPR, Copyright NPR.