Small business vs fortune 500

Mackendy Pierre-Louis
Local Economic Development- Spring 2013
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Small Business Vs Fortune 500 Companies- A Comparison.
The definition of a small business varies in different parts of the globe; Great Britain,
France and Germany have their own definition of what characterizes a small business. In the
United States, a small business is any firm with fewer than 500 employees and generates less
than $7 million in sales. Fortune 500 companies are public companies in the U.S., and are
ranked by sales, assets, earnings, and capitalization (Fortune 500 Law & Legal Def.
USlegal.com). The list ranks only public companies, or those which have issued securities
through an offering and which are traded on the stock market (Fortune 500 Law & Legal Def.
USlegal.com). Both small and Fortune 500s play an important role in the United States
economy. Both employ millions of individuals and together contribute to the largest share of
the country’s gross domestic product (GDP). However, the role of a small business and a
Fortune 500 company pertaining to jobs creation is a contentious topic that is subject to debate.
This paper surveys accessible research data to explore the question whether small businesses
in the United States create more jobs than Fortune 500 companies. The paper investigates what
small business critics are saying, how U.S governments at all levels perceive small business. It
also puts emphasis on the difference in working environment and job quality between the two.
Small Business and Job Creation in the U.S
There are many scholarly studies and research that support popular claims that small
business plays a very significant role in share of jobs creation in the U.S economy. Neumark,
Wall and Zhang (2011) argue that Birch in his central thesis provides evidence that small firms
are really the primary engine of job growth in the United States. Birch claims that 66 percent
of all new jobs between 1969 and 1976 were created with 20 or fewer employees, and 81.5
percent of those by firms with 100 or fewer employees (Birch, 1979; 1981). Later, he points
out that from 1981 to 1985, firms with 20 or fewer employees accounted for 82 percent
of employment growth through expansion or contraction of existing firms, and 88.1 percent
overall of employment growth (Birch, 1987). Armington and Odle (1982) note that from 1978
to 1980 jobs in the private sector increased 8.7 percent and approximately 78 percent of these
increase occurred in establishments with fewer than 100 employees. However, according to
Birch, small businesses’ share of jobs creation is not static. It varies enormously depending on
the period studied (Birch, 1989). For example, in 1980, small businesses’ share declined

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because large corporations or Fortune 500 companies performed well. But, since 1980 there
has been a shift in the job creation momentum, as large companies struggled and their share of
jobs creation plummeted. Meanwhile, millions of jobs have been created by small businesses
(Birch, 1989). Kirchhoff and Phillips (1988) later re-investigate Birch; relying on his data,
they confirm his findings that small business contributes to a significant share of total net new
jobs in the U.S. economy.
Small firms are less able to survive periods of economic difficulty such as recession or
economic contraction because they lack the access to the financial resources available to large
firms or Fortune 500 companies (Armington & Odle, 1982). At the same time, results indicate
that small firms make a greater contribution to job creation during recessionary period
(Kirchhoff and Phillips, 1988). One simple explanation is that recessions spur new business
startups. Stangler (2009), for instance, provides an analysis as to why there are good reasons
to expect recessions and bear markets to open opportunities for new small business startups. In
the United States, particularly during times of turbulence, companies lay off employees or go
out of business: this usually encourages entrepreneurship.
Strangler (2009) explains that because increased in unemployment often concentrated
among large companies, it can free up pools of human capital in two ways: first, unemployed
individuals with some measure of experience may perceive a competitive opportunity to start
a new company; second, entrepreneurs may also target the unemployed as a potential pool of
labor force. This explains why small businesses contribute to a higher percentage of net jobs
creation when the economy is experiencing a downturn or recession. Nevertheless, although
small firms do create jobs in turbulent economic times, they have a limited employment fertility
rate which means they never entirely make up for the job lost by large corporations in the labor
market. In a study of small business fertility rate during the 1982-1984 recessionary period, it
was observed that large corporations lost 950,000 jobs during that period; small firms,
nonetheless, were only able to replace 680,000 of those (Birch, 1989).
More recent data from two relevant sources the Bureau of Labor Statistics’ Business
Employment Dynamics (BED), and the U.S Census Bureau’s Statistics of U.S Business
(SUSB) support the conventional wisdom that small businesses generate most new jobs. BLS
research statistics demonstrate that a net of 1.5 million jobs were lost in 2008 and 68 percent
were from small business, but the data also show that about 65 percent of net jobs creation in
the private sector in the past 15 years were from small businesses (Headd, 2010). On the other

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hand, SUSB figures show that small businesses accounted for nearly 90 percent of net new jobs
growth through 2006 (Headd, 2010). Small business net share in employment growth however
is not uniform, and their share of growth is often influence by geographic factors. Armington
and Odle (1982) notice that small firms tend to thrive in weaker and declining industries (i.e.,
manufacture, agriculture and retail). In these industries, small firms usually employ a higher-
than-average share of workers and have a much higher share of growth than in fast growing
industries such as mining, transportation, finance and services. They add that in growing
regions small firms’ share of growth is less than their employment rate (Armington & Odle,
2010). This according to them seems to be the results of high rate employment losses from
small establishment demises, which are the consequence of increasing share of employment by
large firms in these regions.
Critics of Small Businesses; what the Evidence Reveals
As clear as the evidence may appears, many still question whether small business is a
very significant job engine for the U.S economy as popular perception often portrays it. Critics
against small businesses argue “to portray small businesses as the engine of job growth is to
vastly overstate their role (Critics’ opinion. Bloomberg.com, Oct 2012).” To defend their
arguments, they highlight all the loopholes and tax benefits provided to small businesses. They
bring four defensive arguments forward: First, small businesses destroy as much jobs as they
create, and their share of employment is usually less than Fortune 500 companies; second, to
avoid paying corporate taxes, many small-business owners’ only report profits on their
individual tax returns; third, the way small businesses are structured, it is sometimes
impossible to designate them as either small or large, and many businesses designated as malls
are not engaged in traditional small businesses activities, Instead, they are partners in hedge
funds, law firms and private-equity shops, or they are highly paid actors, athletes, speakers and
authors; fourth, small businesses enjoy a host of tax breaks, including the ability to
immediately deduct many costs as a business expense. (Critics’opinion. Bloomberg.com, oct
2012). Despite the many dissenting views “which may prove to be relevant in some
circumstances”, it is evident, as Stangler (2009) puts it, that small firms play an important role
in digging the U.S economy out of recessions.
In time of economic recessions, small business jobs growth usually exceeds that of large
firms. Contrary to what critics highlight, their share of employment growth is usually lesser
than Fortune 500 companies. Headd (2010) observes that during the 2001 economic downturn,

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firms with 20 to 499 employees experienced 43 percent of the net employment losses, firms
with fewer than 20 workers 7 percent, and large firms including Fortune 500 firms 50 percent.
As the economy began to improve in 2002, firms with fewer employees created net new jobs
while large firms continues to shed jobs, but at a slower pace as did firms of 20 to 499
employees. Research statistics have even shown that small businesses have higher net
employment growth rate when the U.S. economy begins to recuperate after a downturn. As an
example, Shane (April, 2012) mentions that in a monthly employment analysis of 300,000
private businesses using Automatic Data Processing (ADP) payroll services, it shows that in
March 2012 companies with 49 workers or more employed 2.6 percent more people than they
did in July 2009, when the economic recovery began. Similarly, businesses with 50 to 499
workers employed 3.2 percent more people in March 2012 than they did at the beginning of
the recovery (Shane, April 2012. Bloomberg Businessweek). Companies with 500 or more
workers, however, employed 0.2 percent fewer people in March 2012 than in July 2009 (Shane,
April 2012. Bloomberg Businessweek). Furthermore, in non-downturn periods, BED data show
that small firms account for around 60 percent of net new jobs and SUSB data show a larger
figure of around 75 percent (Headd, 2010).
Localities, States, the Fed and Small Business
Headd (2010) reports that in 2006, small businesses contribute to an equal share of
employment in the overall U.S economy as large firms or Fortune 500 companies (e.g., small
firms employed 60 million and large firms 60 million of the country’s labor force respectively).
The small business sector represents an important source of employment for most localities (if
not all). Conscious of this fact, all local governments have instituted some form of job creation
assistance program in their economic development policy to either encourage small existing
businesses to expand, attract new business establishments or to prevent businesses from failing
in their jurisdiction. Hillsborough County, Florida for example has a job incentive program
designed to promote job creation in the area by offering a wage reimbursement to small
business owners (Hillsborough County News Release, Sep 2011). Through the program, the
County dedicates up to 50 percent of three months’ total salary of new jobs created, an
equivalent of 3,900 per new employee to boost small business jobs creation (Hillsborough
County News Release, Sep 2011). It is estimated that the program will encourage the creation
of about 200 jobs, offering a total of 500,000 to local small business (Hillsborough County
News Release, Sep 2011). If a County government is ready to dedicate hundreds of thousands

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of dollars to support and promote small businesses, there must be some advantages associated
with it. Armington and Odle (1982) comment “an intrinsic part of a community; small business
is more responsive to local influences, more willing to adapt to local conditions and less likely
to migrate to other locations.”
During election campaigns, politicians always put forth their desire to support small
businesses. The Obama administration’s aspiration to extend the Bush tax cuts for families
earning less than 250,000, for instance, is not only aimed at helping the working American
middle class, but the small business sector as well. Beside localities, the federal government
and the states make funds available (e.g., loans, grants, tax benefits and venture capital) to
assist small businesses. In 2010, the U.S Congress passed the Small Businesses Job Act or
(Lending Fund Act). The act is designed to provide capital to qualified community banks and
community development loan funds (CDLFs) to support small business lending (Small
Business Lending Fund. Treasury.gov). There are many organizations put in place to help small
businesses. These can be either governmental in nature (e.g., Small Business Administration
"SBA") or not for-profits organizations (e.g., chamber of commerce). These organizations may
exit at the local level to serve local small businesses’ purpose or at the state and federal level
to serve a broader purpose. The small business Administration (SBA) is a federal agency
independent in nature. It is there to aid, counsel, assist and protect the interests of small
business, to preserve free, competitive enterprise and to maintain and strengthen the overall
economy (SBA mission statement. SBA.gov). Local private institutions or associations also
often provide loans and venture capital to encourage new small business ventures in their
community. All these attentions and efforts put toward helping small business
development indicate that they do play a significant role in creating jobs in the U.S economy.
Small Business and Job Quality
Let’s leave the job creation debate to cover another topic that also pertains to small
business: job quality. The number of jobs created by an employer is not the only thing that
matters (Halmilton & Medoff 1990; Neumark, Wall & Zhang, 2012). Comparing the quality
of jobs created by small firms and those created by large firms, these authors argue that small
firm jobs are less desirable because they tend to exist for a shorter period of time, pay lower
wages and have less generous fringe benefits in term of health insurance, vacation and pension
plan (Halmilton & Medoff, 1990; Neumark, Wall & Zhang, 2012). In addition, small firms
tend to have poorer working condition and provide fewer jobs training (Halmilton & Medoff,

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1990; Neumark, Wall & Zhang, 2012). Headd (2010) refutes the argument that small
businesses provide inferior jobs, maintaining that large and small firms have similar shares of
part-time employees. For example, about 21 percent of small firms’ labor force were part-time
employees compared to 18 percent for large firms (Headd, 2010). He also provides a delicate
explanation why small firms have a slightly higher share of part-time employees “consider a
firm with two employees that wants to increase employment by 25 percent; a firm with one
employee would add one employee part time. Whereas, a firm with 500 employees would add
125 employees full time to achieve the same increase (Headd, 2010).”
On the other hand, Headd (2010) does support the argument that small business jobs
are less desirable. In contrast, he brings forward two different reasons why small firms’ jobs
are less desirable. First, small firms tend to fill the niches of the labor market that are
undesirable and often have high unemployment rates (e.g., unskilled employees and
minorities). Second, small firms employed more individuals with low educational attainment
compared to larger firms (Headd, 2010). Despite the detrimental epithet attributes to small
firms jobs, Birch (1989) notes that employees experience more job security working for a small
firm than a large one. He continues “employees going to work for a Fortune 500 company are
less likely to have their jobs at the end of next year than they are if they go to work for a small
start-up company (Birch, 1989).” One way to examine the essence of Birch’s statement is to
go back to Headd’s argument that small firms tend to fill the niches of the labor market that are
un-deserved (i.e., the unskilled, minorities and individuals with low educational
attainment). The disparity in job security therefore suggests that Fortune 500 companies tend
to have a more skilled and educated workforce. An educated and skilled workforce tends to
enjoy greater mobility, to have more demands for his or her labor, and more job options. It
makes perfect sense if an employee has less demand for his or her labor in the market. He or
she has a higher chance of experiencing joblessness. This employee will certainly hold firm to
his or her job and that no matter what the job conditions might be.
Conclusion
Based on the many scholarly evidences, there is no doubt that small businesses are an
important force in the U.S economy. Small businesses’ impact on the economy can be felt
when an economic downturn or a recession surfaces. In time of recessions when businesses of
all types are filing for bankruptcy, laying off their employees or closing down their facilities.
This may eventually encourages more entrepreneurial quests which in turn give rise to small

7
business start-ups. As a result, small firms often lead Fortune 500 companies in jobs creation
during economic downturns. The role that recession play in encouraging new firms formation
and in return the role these firms play in enhancing back the economy led Stangler (2009) to
make this comment on the most recent 2007 recession “despite the current recession, there is a
reason for hope; good things do grow out of recession.” Most of the Fortune 500 companies
that are now competing with small businesses started as small firms and most came into
existence during a bear market or recession. Microsoft and Walmart started as small firms and
then grew to become the big, global conglomerate that they are today. Moreover, as the data
show in this paper, jobs creation is not static, it involves some up and down. During a downturn,
small businesses usually produce more jobs. In non-downturn period, sometimes small
business lead Fortune 500 companies in shares of net jobs creation, sometimes their shares are
equal, and sometimes Fortune 500 companies do well. Nevertheless, one thing to keep in mind
is that all the attentions given to small businesses by policy-makers, and the efforts put forward
by private associations and governments at all levels to support the small business cause,
encouraging small business ventures validate the popular notion that small businesses do
actually play a significant role in creating jobs and in boosting our country’s economy.
References
Birch L. D (1989). Change, Innnovation and Job Generation. Journal of Labor Research.
Fortune 500 Law & Legal Def. Retrieved (March, 2013).
From http://definitions.uslegal.com/f/fortune-500/
Business Administration “Mission Statement.” SBA.gov. Retrieved (March, 2012).
From http://www.sba.gov/content/mission-statement-0
BusinessWeek. Retrieved (March, 2013). From F:small-business-job-creation-is-stronger-
than-we-think.htm
Headd B (March, 2010). An Analysis of Small Business and Jobs. SBA Office of Advocacy.
Hillsborough County News Release. Fund Still Available for Small Business & Job Creation
Program. Retrieved (March, 2013). From http://fl-
hillsboroughcounty.civicplus.com/DocumentCenter/Home/View/409
Kirchhoff B.A & Phillips B.D (1988). The Effect of Firms Formation and Growth on the Job
Creation In the United States. Journal of Business

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Neumark D, Wall B & Zhang J (Feb, 2011). Do Small Business Creates More Jobs? New
Evidence for the United States Establishment Time Series. The Review of Economics and
Statistics. 93 (1). pp 16-29
Odle M. & Armington C. (1982). Small Business How Many Jobs. The Brooking Review, Vol
1. No 2.
Shane S (April 26, 2012). Small Business Job is Stronger than we Think. Bloomberg Small
Small Business is not a Job Engine (Oct 2012). Retrieved (March, 2013). From F:time-to-
debunk-the-myth-of-small-business-as-job-engine.html
Small Business Lending Fund. Treasury.gov. Retrieved March 2013.
From http://www.treasury.gov/resource-center/sb-programs/Pages/Small-Business-Lending-
Fund.aspx
Stangler D. (June, 2009). The Economic Future Just Happened. Ewing Marion Kauffman
Foundation

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