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Will Small Businesses Create Enough New Jobs?

Will Small Businesses Create Enough New Jobs?

by Dennis Jacobe

The big economic issue for this year’s presidential election is likely to be job growth. On Friday, the Labor Department’s most current surveys will tell us more about the state of new job creation. If the numbers are positive, we’ll hear that the recovery is finally producing the much-anticipated job growth associated with an economic recovery. If the numbers are not good, we’ll hear more about the "jobless recovery."

 

Regardless, it is obvious that many of the nation’s largest corporations are sending jobs abroad, which is in their stockholders’ interests because reduced labor costs increase productivity and directly benefit the corporate bottom line.

 

One consequence is that overall U.S. job growth may depend almost entirely on small businesses. Small businesses have always been a driving force in the growth of the U.S. economy and the major source of new job creation. The question for 2004, however, is whether small businesses can not only create their usual number of new jobs, but also produce enough to offset the overseas job transfers America’s largest corporations are making.

 

As was the case in August 2003, a key finding of the latest Wells Fargo/Gallup Small Business Index* provides hope concerning new job creation: 21% of small business owners expect to increase the number of jobs (or positions) at their companies over the next 12 months. This is 3 1/2 times the 6% who expect to decrease the number of jobs they have over the same period. Given the sample sizes involved, this finding is essentially unchanged since August.

 

The Wells Fargo/Gallup Small Business Index

 

The Wells Fargo/Gallup Small Business Index consists of two dimensions: 1) small business owners' ratings of the current situation of their businesses, and 2) small business owners' ratings of how they expect their businesses to perform over the next 12 months. The overall Index is the sum of the two dimensions -- the Present Situation Dimension and the Future Expectations Dimension. Because of the way the Index is constructed, a positive score can be interpreted as "net-positive" ratings from small business owners about their companies. A negative number reflects "net-negative" ratings. Any number close to zero suggests that small business owners are about evenly divided between positive and negative assessments.

 

In December 2003, the Wells Fargo/Gallup Small Business Index produced an overall score of 93 -- a major increase compared with the August measurement of 69. The Present Situation Dimension stands at 35, up from 21 in August. The Future Expectations Dimension increased to 58 from 48. These scores suggest that small business owners are substantially more optimistic about their current operating environments and their expectations for the next 12 months than they were last summer.

 

 

Company Job Creation Over the Past 12 Months

 

About as many small business owners say that the number of jobs in their companies decreased over the past 12 months as say that the number of jobs increased (8% compared with 11%). This explains why job creation in the United States has been so anemic, particularly since many large corporations are reducing their numbers of employees in the United States.

 

 

 

Job Creation in the Months Ahead

 

Normally, small businesses account for more than half of the country’s private-sector jobs. In this regard, that many more small businesses owners plan to increase, rather than decrease, their hiring over the next 12 months is a positive sign for job creation.

 

On the other hand, the U.S. economy has shown strong economic growth during the past two quarters. Given such a strong economic expansion, one might have expected small business hiring intentions to have significantly increased by the end of last year. This is particularly the case given the sharp increase in small business owner optimism that took place during the past couple of quarters.

 

Is it possible that the same factors that are encouraging large U.S. corporations to send U.S. jobs to Asia are discouraging small business owners from hiring new employees? If so, then the new job creation problem may prove to be much more serious than previously anticipated.

 

*Results for the total dataset are based on telephone interviews with 594 small business owners, conducted Nov. and Dec. 1-15, 2003. For results based on the total sample of small business owners, one can say with 95% confidence that the margin of sampling error is ±4 percentage points.


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