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How Important are Small Businesses to the Economy?

small business benefitsEveryone talks about how important small businesses are to the U.S. economy. It is a major talking point for business news journalists and politicians, regardless of their party affiliation. Just how important, however, are small businesses to the economy? Should the United States invest more in its small business entrepreneurs, or should the country focus on growing employment, manufacturing, and services within the largest companies?

What Is a Small Business?

Before entering a conversation about the merits of small businesses, it is important to understand exactly how the term is defined. The mom-and-pop grocery on the corner certainly qualifies, but what about a law firm with a few hundred workers, or a customer service call center with 400 employees? The precise definition of “small business” can vary somewhat from industry to industry. Generally, though, any business with fewer than 500 employees qualifies as a small business. That lumps your local record store and a shipping company with 499 employees into the same category.

Do Small Businesses Create Jobs?

There are significantly more small businesses than large businesses in the United States. In 2006, there were over 6 million small business employers compared to barely more than 18,000 large employers. That does not, however, necessarily mean that small businesses are more important to the economy. After all, you could potentially divide the employees working for one extremely large company into numerous businesses. In fact, many companies operate as independent departments working within the same organization. If the total number of employees working for large businesses is greater than the total number working for small businesses, then perhaps the U.S. should give up on the small business dream.

It turns out, however, that small businesses produce more jobs than large businesses. Between 2005 and 2006, the small business sector created more than 2.5 million jobs, while the large business sector created little more than 1 million. This is a trend that one could trace through the modern economy. Between 2003 and 2004, small businesses created 1.89 million jobs, and large businesses actually lost more than 200,000 jobs. Between 2004 and 2005, small businesses created nearly 980,000, while large businesses only created a little more than 260,000.

Supporting Small Businesses Is the Smart Thing to Do

This data shows that small businesses really are important to rebuilding the economy. If the country wants to lower the unemployment rate, help lift people out of poverty, and reduce the amount of money that the government spends on unemployment benefits, then it makes sense to invest more in small businesses.



Matt Thompson has written for numerous online and print publications. He has spent time as an editor for a media research company that supplies marketing materials to some of the country's most influential corporations.