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March 21 2016

Why Aren't Small Businesses Creating Jobs at Their Historic Rate?

Patrice J. Lee

For decades, we’ve held up small businesses as the engine of our economy – producing the goods and services we consume as well as creating new jobs for our economy.

New analysis suggests an interesting shift in job creation--it is moving away from small business to large employers, and this is in large part because taxes and government regulations have made it increasingly harder for entrepreneurs and small businesses to grow.

According to the Bureau of Labor Statistics, companies with 250 employees or more contributed 45 percent of net new jobs compared to small businesses (1-49 employees) which contributed 34 percent of net new jobs. Medium-sized businesses (50-249 employees) contributed 21 percent.

Census data tell us the number of jobs created by small businesses has declined by 38 percent since the early 1990s. Apparently, in 1994 a new business on average created 7.3 jobs in its first year, but that has fallen to 4.5 jobs in 2015. In addition pre-recession, start-ups added 3.04 million jobs, but that has fallen to 2.4 million jobs each year.

Various surveys of employers point to the causes. Chief among them are taxes and regulations as CNBC reports:

In a survey on small-business owners' top concerns in the election, released in February by online small-business lender OnDeck, 56.6 percent cited economic growth, 41.1 percent mentioned tax policy, 40.5 percent cited health-care costs, 24.2 percent said they are worried about new or changing regulations at the national and state level, and 21.8 percent are concerned about the strength of the skilled/educated workforce.

In another, recent survey by Spectrem Group, which provides research to help financial advisors understand investors, 74 percent of business owners said taxes are their greatest concern, followed by government gridlock and regulations. If there is a 10 percent increase in cumulative regulatory costs, the number of businesses with fewer than 20 workers dips by 5 percent to 6 percent, according to recent research by the American Action Forum, a right-leaning policy institute.

The message is clear: We need lower taxes and less regulation to free companies of all sizes from the cost burdens that make it difficult to expand. Under the Obama Administration, we’ve seen the scope of the regulatory system grow, thanks to ObamaCare, Dodd-Frank, and numerous environmental regulations. The costs to businesses are counted not just in dollars, but forgone jobs.

Another major trend that could be keeping entrepreneurs and small businesses from expanding the workforce is the on-demand economy and the rise of free lancers. For example, in 2013 contract costs as a percentage of total lobar spending had risen 18 percentage points from 2003 to nearly a third.

Steven Lindner handles recruiting for a number of fast-growing small businesses as executive partner of The Workplace Group, a provider of outsourced and strategic recruiting solutions in the New York City area. Many of his clients are outsourcing work that would have been done in-house 20 years ago to outside experts, he said. For instance, few are hiring in-house accountants, HR professionals and in-house attorneys — and in-house marketing and advertising teams today are very lean…

And as in the rest of the economy, many of the jobs that are being created are on the lower end of the wage scale.

While structural changes such as preferences of freelance worker over in-house workers  can be a good thing, offering more freedom and flexibility in many instances, the same cannot be said for our tax code and regulatory structure. Compliance with regulations imposes costs. President Obama plans to ram some 4,000 regulations through this year at an estimated costs of $100 million. The cost will be borne by consumers in higher costs and by workers who don't get hired  because employers can't afford them.

 

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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