An often-repeated truism of the U.S. economy is that small businesses—generally defined as those with fewer than 500 employees—account for about two-thirds of job creation. This claim is easy to accept, given that businesses with fewer than 500 employees account for 99 percent of the nation’s businesses and employ about half of working Americans. Indeed, firms with fewer than 20 employees account for 89 percent of all firms and 18 percent of total employment.1 The sheer number of small businesses across the nation, the significant proportion of total employment they account for, and the independence and self-sufficiency they represent help make small businesses a favorite constituency of elected officials of both parties.
But the reputation of small business as the engine of job creation is inaccurate—or, perhaps better stated, imprecise.
A breakthrough 2009 study of U.S. Census Bureau statistics—new data called Business Dynamics Statistics (BDS) that allow for unprecedented analysis of the creation and development of U.S. businesses—reveals that America’s true engine of job creation is not small businesses broadly defined, but rather new businesses. According to the study, over the period 1980 to 2005 businesses less than five years old accounted for all net new job creation in the United States.2
Even more remarkable, subsequent analysis of the BDS data by Tim Kane, a former research scholar at the Ewing Marion Kauffman Foundation ...