Study Questions Role of Small Firms

Challenging conventional wisdom that small businesses are the heroes of the nation’s economy, a new study concludes that many of these firms are shortchanging the work force with low wages, skimpy benefits and tenuous job security.

Those are some of the findings of a report by the Economic Policy Institute, a Washington think tank unpopular in business circles for its support of a higher minimum wage and other pro-worker policies.

The new study, titled “Small Consolation: The Dubious Benefits of Small Business for Job Growth and Wages,” also questions whether small businesses are really powering America’s robust growth. The report concludes that small firms don’t create more net new jobs than large firms. And it is critical of what it calls government’s “preferential treatment” of small companies, which are exempt from some oversight and regulation.

Economists said some of the data are too narrow and too old to be useful, and they expressed doubt that the study will derail the small-business lobby’s growing clout on Capitol Hill. Small-business leaders are irked by what they say is the study’s pro-union, big-government agenda.

The Economic Policy Institute said it’s simply trying to paint a more realistic picture of small business, which it contends is doing less for workers and the economy than is popularly portrayed.

“Small businesses get a lot of breaks because they’re seen as important to the economy,” said Edie Rasell, an economist for the institute. “But they are not the engine of job growth, and they don’t provide the greatest-quality jobs.”

Using data from the Census Bureau’s 1993 Current Population Survey, the survey’s authors found the following:

* Workers at firms with more than 1,000 employees made an average of $13.05 an hour. That was 39% more than the $9.39 an hour average earned by workers at firms with fewer than 25 employees. Adjusting for education, experience and other factors, employees at large firms still earned 11.5% more than those at small ones.

* About 78.4% of workers at large firms had health insurance, compared with 30% at small firms. About 68.7% of big-company workers were covered by a pension plan, while only 13.2% of small-business employees had the perk.

* Workers enjoyed more tenure with large companies, staying an average of 8.5 years at the largest firms, compared with 4.4 years at the smallest.

Factors such as education, experience and unionization explain why some big firms pay workers more than small ones. But some of the gulf defies easy explanation, according to Erica Groshen, a labor economist with the Federal Reserve Bank of New York who coauthored a portion of the study with economist Dale Belman of the University of Wisconsin at Milwaukee. The pair concluded that the wage and benefits gap hasn’t changed much in the last 15 years.

“By every straightforward measure, large firms seem to provide better jobs,” Groshen said. “It kind of runs counter to the view in some circles that what we need is a lot more young, dynamic firms. . . . The worker’s choice of where the right place to be is quite different from that of the policymakers.”

Although the wage differential between large and small firms is widely known, other economists said the EPI made it look worse than it is by highlighting the gulf between the tiniest firms and the giants. A Small Business Administration study pegged the average pay gap at about 10% and shrinking.

Small-business advocates note that every big firm offering top pay and benefits was once a shoestring start-up. They are particularly miffed that the EPI is using the wage issue to suggest small firms need more regulation. For example, some firms with revenue of less than $500,000 are not bound by federal minimum wage laws.

“It’s irrelevant. I don’t know of a single small company that isn’t paying at least minimum wage in this tight job market,” said Todd McCracken, president of National Small Business United. “This report is just a hook to promote [the EPI’s] vision of greater government involvement in the economy.”

There is also disagreement on the EPI’s conclusion that small businesses aren’t the job-creation machines other studies have made them out to be.

Using employment data for the state of Maryland from 1987, 1990 and 1993, researchers found that small businesses there created jobs much more rapidly than did big firms. However, the little guys also shed jobs more quickly because of higher failure rates and other factors. The end result: Small businesses actually posted net job growth rates no better--and sometimes worse--than big firms after factoring in all those employment ebbs and flows.

“Bottom line, [small businesses] are not an unusually large creator of jobs on net,” said David Stevens, a University of Baltimore economist who coauthored that part of the EPI study with economist Julia Lane of American University in Washington. “That’s not throwing stones at them. It’s saying let’s be honest about this and look at job destruction as well as creation.”

Other economists questioned whether the researchers could reach such sweeping conclusions by looking at data from a single state over part of a recession period. The most recent nationwide census figures show that between 1990 and 1995, businesses with fewer than 500 employees created 5.2 million net new jobs, or 76% of all new employment.

“There is no question that small businesses are creating more jobs than they destroy,” said Bruce D. Phillips, director of economic research for the SBA. “I don’t think [the EPI] report is going to change the debate at all.”

William Dunkelberg, chief economist for the National Federation of Independent Business, concurred.

“Economists are good at spouting numbers, but all you’ve got to do is open your eyes and look around,” he said. “We’re employing a record number of people in this country. Who is responsible for that? I’ll tell you right now it’s not General Motors or General Electric.”

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