Are New Small Businesses The Cause of US Labor Shortages
Small businesses are responsible for more than half of all jobs in America and generate over half of our GDP. The criticality of small business to the U.S. economy is significant. The common stereotype of a small business is a local retail shop or contractor; however, the official definition of a small business is a firm with up to $40 million in revenue and a maximum cap of 1,500 employees. Small business growth since 2012 has been growing and during the pandemic, growth exploded.
Notable business analysts on Bloomberg, CNBC and Fox Business News attribute labor shortages to retiring baby boomers, the “Great Resignation” by Millennials, and the prevalence of stimulus checks that provided a disincentive for employees to return to work. Absent from any analysis is the prevalence of small businesses, especially new small businesses. As the chart above reveals, from 2019 to 2021, new small business applications increased by 54%. Let that sink in for a moment. 54%. Further examination reveals that the number of employees in small businesses has remained flat as compared to the annual growth in the total number of businesses.
Our assessment is that most of the new small businesses are single owner/sole proprietors that have opted out of larger organizations to become their own boss. This increase in supply of business units has a three – fold effect on the labor market:
- Seasoned employees that opt out of corporate settings place an undue strain on corporate employers as skilled and seasoned employees, typically in the management layers, have higher replacement costs and cannot be easily substituted through automation or temporary hiring.
- New small businesses seeking to expand must compete for the same pool of employees with their corporate competitors and with other new small businesses. This places upward pressure on wages, (good for employees), and…
- The given shortage of employees causes current employees and/or businesses owners to work more hours to meet demand, raise prices and raise salaries. While working more hours may be seen as efficiency/productivity gains, price increases and wage increases are inflationary.
The Federal Reserve Chairman, Jerome Powell, explained that inflation was transitory. We believe that inflation is more structural as there is clearly more competition for a shrinking pool of workers.
More than 30 million small businesses account for over 50% of all jobs in the U.S.
There are more than 30 million small businesses in the U.S., which account for over 50% of all jobs in the country and generate over half of the country’s GDP.
If you’re a small business owner, there’s no doubt that your concerns about labor shortages are valid. But is this really just a problem for you? Or is it one that affects everyone? The truth is that the health and stability of our economy depends on small businesses. According to data from the Small Business Administration (SBA), small businesses account for over 50% of all jobs in the United States. So when they can’t find employees to fill open positions, it has an impact on everyone—including large businesses with many employees and individuals looking for work outside large companies. In addition to offering employment opportunities, small businesses also drive job creation: they’re responsible for around two-thirds of net new jobs created each year according to SBA research conducted by economists at Pepperdine University and Brigham Young University; these economists found evidence showing how important this link between entrepreneurship and employment growth is when looking at historical U.S., European Union countries as well as other developed nations’ economies
Small businesses generate over half of the country’s GDP.
Small businesses in the United States make up 65% of all businesses according to the SBA. As such, they are a critical driver of economic growth and productivity. In addition to being the backbone of our economy, it’s important to note that smaller businesses are more reliant on local labor than larger companies. This can be due to their proximity to their customers (which increases reliance on local workers), small companies’ inability to offer large salaries and benefits as other industries do, or a combination of both factors. In fact, recent studies have shown that in areas where unemployment rates have increased significantly during this recessionary period (i.e., areas hardest hit by “recovery”), small firms experienced more difficulty recruiting employees at higher rates than did large businesses with more hiring power across the board; however these findings may also be explained by an increase in automation technology at large firms which has reduced hiring needs while simultaneously increasing productivity levels among existing employees!
Small business revenues have increased by nearly 20% since 2012.
Small business revenues have increased by nearly 20% since 2012, while the average worker’s salary has fallen. The reason for this discrepancy? Small businesses are unable to find enough employees to fill their positions, so they’re being forced to work longer hours. In fact, small business owners are working an average of 40 hours per week—six hours more than the national average in 2018. This statistic is especially alarming given that small businesses often consist of only one employee or a handful of workers at most; with no employees available to help out and share duties with another person on staff, it becomes impossible for business owners not only to meet all their own responsibilities but also those expected from them by clients or customers as well.
Source: NFIB Small Business Economic Trends (2021)
Nearly 300,000 new small businesses started each month in 2020, caused by the pandemic
The number of small businesses that started each month in 2020 increased by nearly 300,000 compared to the previous year. This is an increase of nearly 70%, and over the last decade it’s been a steady increase as well.
The number of new small businesses created per month has increased over 200 percent since 2010, from around 100K to more than 300K per month now. In 2020, when the pandemic hit, many people were temporarily furloughed, had reduced hours or lost their jobs outright. These individuals reacted by starting their own businesses. The pandemic caused many businesses to close down, which further contributed to the labor shortage of small businesses.
- 80% of new small businesses started in 2020 named “pandemic” as a reason for starting their business
- 7% of new small businesses started in 2020 named “job loss/unemployment” as a reason for starting their business
Small businesses started by state
When you think of small business owners, you might picture an entrepreneur building a big company from the ground up. Most entrepreneurs start small. In fact, there are twice as many small businesses (1 to 99 employees) in the U.S. as there are large ones (100 or more employees).
The number of small businesses varies by state: for example, Texas, Georgia, Virginia and Kentucky led the nation respectively in new small business applications. The industries in each of these respective states also vary as the second chart identifies the areas of expansion.
The Bureau of Labor and Statistics defines the Professional, Scientific and Technical Services sector as occupations that encompass the following activities:
- Legal Services: NAICS 5411
- Accounting, Tax Preparation, Bookkeeping, and Payroll Services: NAICS 5412
- Architectural, Engineering, and Related Services: NAICS 5413
- Specialized Design Services: NAICS 5414
- Computer Systems Design and Related Services: NAICS 5415
- Management, Scientific, and Technical Consulting Services: NAICS 5416
- Scientific Research and Development Services: NAICS 5417
- Advertising and Related Services: NAICS 5418
- Other Professional, Scientific, and Technical Services: NAICS 5419
Small business productivity gains
So why are small businesses so productive? The answer is two-fold, and it’s all about how small business owners manage their companies. First off, they’re more innovative than their larger counterparts. Small businesses have the advantage of being able to pivot faster and change direction at a moment’s notice—they can make decisions without going through layers of bureaucracy or waiting for consensus from top management down. And when you’re working with fewer resources, you’ve got to find ways to get more out of them: that means coming up with new ideas for how your business operates on an ongoing basis.
Second, because these companies tend to be led by one person or a handful of people who make all the decisions themselves (rather than having dozens of managers weighing in), they don’t waste time debating whether something should happen or not; they just do it. This makes them more agile than bigger operations—which means they can respond quickly when opportunities arise—and also leads directly into another benefit: speed.
The key takeaway from this article is that there are more small businesses starting in the U.S. than ever before, and this could lead to a shortage of labor for these new small businesses. This means that employers will need to find ways to attract workers or pay more for existing staff members as they struggle with high turnover rates due to lack of work/life balance issues like stress levels, salary expectations and lack of job security. On the flipside, if you are entering the job market, you should weigh the pros and cons of working for a large firm or having the flexibility and autonomy of working for a smaller firm. Finally, our next article will look at entrepreneurial opportunities in the health care and social services sectors.