Small Business Administration and
Job Creation
Robert Jay Dilger
Senior Specialist in American National Government
January 29, 2015
Congressional Research Service
7-5700
www.crs.gov
R41523
Small Business Administration and Job Creation
Summary
The Small Business Administration (SBA) administers several programs to support small
businesses, including loan guaranty programs, disaster loan programs, management and technical
assistance training programs, and federal contracting programs. Congressional interest in these
programs has increased in recent years, primarily because they are viewed as a means to stimulate
economic activity, create jobs, and assist in the national economic recovery.
This report examines the economic research on net job creation to identify the types of businesses
that appear to create the most jobs. That research suggests that business startups play an important
role in job creation, but have a more limited effect on net job creation over time because fewer
than half of all startups are still in business after five years. However, the influence of small
business startups on net job creation varies by firm size. Startups with fewer than 20 employees
tend to have a negligible effect on net job creation over time whereas startups with 20-499
employees tend to have a positive employment effect, as do surviving younger businesses of all
sizes (in operation for one year to five years).
This report then examines the possible implications this research might have for Congress and the
SBA. For example, the SBA provides assistance to all qualifying businesses that meet its size
standards. About 97% of all businesses currently meet the SBA’s eligibility criteria. Given
congressional interest in job creation, this report examines the potential consequences of targeting
small business assistance to a narrower group, small businesses that are the most likely to create
and retain the most jobs.
In addition, the Government Accountability Office (GAO) has recommended that the SBA use
outcome-based program performance measures, such as how well the small businesses do after
receiving SBA assistance, rather than focusing on output-based program performance measures,
such as the number of loans approved and funded. GAO has argued that using outcome-based
program performance measures would better enable the SBA to determine the impact of its
programs on participating small businesses. Given congressional interest in job creation, this
report examines the potential consequences of adding net job creation as an outcome-based SBA
program performance measure.
This report also examines the arguments for providing federal assistance to small businesses,
noting that policymakers often view job creation as a justification for such assistance whereas
economists argue that over the long term federal assistance to small businesses is likely to
reallocate jobs within the economy, not increase them. Nonetheless, most economists support
federal assistance to small businesses for other purposes, such as a means to correct a perceived
market failure related to the disadvantages small businesses experience when attempting to access
capital and credit.
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Small Business Administration and Job Creation
Contents
Small Business and Net Job Creation .............................................................................................. 1
Economic Research on Net Job Creation......................................................................................... 2
Small and Large Employer Firms .............................................................................................. 2
Startups and Non-startup Employer Firms ................................................................................ 3
Startups by Firm Size ................................................................................................................ 4
The Role of Small Business and Startups in Net Job Creation .................................................. 5
The Role of Surviving Startups in Net Job Creation ................................................................. 7
The Role of High-Impact Businesses in Net Job Creation ........................................................ 9
The Role of High-Technology Firms in Net Job Creation....................................................... 11
Summary Discussion ............................................................................................................... 12
Implications for Congress and the SBA ........................................................................................ 13
Using Net Job Creation to Measure SBA Program Performance ............................................ 15
Using Net Job Creation to Target SBA Assistance .................................................................. 17
Concluding Observations ............................................................................................................... 18
Tables
Table 1. Employer Firms, Number and Employment, by Firm Size, 2012...................................... 3
Table 2. Number of Employer Firms, by Startups and Non-startups, 2005-2011 ............................ 3
Table 3. Employment Effect of Employer Firm Startups and Non-startup Expansions,
Contractions, and Deaths, 2005-2011 ........................................................................................... 4
Table 4. Employer Firm Startups, Number and Employment, By Firm Size, 2005-2011 ............... 5
Contacts
Author Contact Information........................................................................................................... 19
Congressional Research Service
Small Business Administration and Job Creation
Small Business and Net Job Creation
The Small Business Administration (SBA) administers several programs to support small
businesses, including loan guaranty programs to enhance small business access to capital;
contracting programs to increase small business opportunities in federal contracting; direct loan
programs for businesses, homeowners, and renters to assist their recovery from natural disasters;
and small business management and technical assistance training programs to assist business
formation and expansion.1 Congressional interest in the SBA’s programs has increased in recent
years, primarily because they are viewed as a means to stimulate economic activity, create jobs,
and assist in the national economic recovery.
This report opens with an assessment of the economic research on net job creation (employment
gains related to business startups and expansions minus employment losses related to business
deaths and contractions) to identify the types of businesses that appear to create the most jobs.
That research suggests that business startups play an important role in job creation, but have a
more limited effect on net job creation over time because about one-third of all startups close by
their second year of existence and fewer than half of all startups are still in business after five
years. However, the influence of small business startups on net job creation varies by firm size.
Startups with fewer than 20 employees tend to have a negligible effect on net job creation over
time whereas startups with 20-499 employees tend to have a positive employment effect, as do
surviving younger businesses of all sizes (in operation for one year to five years).2
This information’s possible implications for Congress and the SBA are then examined. For
example, since its formation the SBA’s primary goal has been to promote business competition
within the various industrial classifications as a means to deter monopoly formation.3 As part of
that effort, the SBA provides assistance to all qualifying businesses that meet its size standards.
About 97% of all business concerns currently meet the SBA’s eligibility criteria.4 Given
1 U.S. Small Business Administration, “Fiscal Year 2015 Congressional Budget Justification and FY2013 Annual
Performance Report,” pp. 3-4. For further analysis of the SBA’s loan guaranty programs, see CRS Report R41146,
Small Business Administration 7(a) Loan Guaranty Program, by Robert Jay Dilger, CRS Report R41184, Small
Business Administration 504/CDC Loan Guaranty Program, by Robert Jay Dilger, and CRS Report R41057, Small
Business Administration Microloan Program, by Robert Jay Dilger. For further analysis of the SBA’s disaster loan
programs, see CRS Report R41309, The SBA Disaster Loan Program: Overview and Possible Issues for Congress, by
Bruce R. Lindsay. For further analysis of the SBA’s contracting programs, see CRS Report R40744, The “8(a)
Program” for Small Businesses Owned and Controlled by the Socially and Economically Disadvantaged: Legal
Requirements and Issues, by Kate M. Manuel, and CRS Report R41268, Small Business Administration HUBZone
Program, by Robert Jay Dilger.
2 Zoltan Acs, William Parsons, and Spencer Tracy, “High-Impact Firms: Gazelles Revisited,” U.S. Small Business
Administration, Office of Advocacy, June 2008, at http://archive.sba.gov/advo/research/rs328tot.pdf; Dane Stangler
and Robert E. Litan, “Where Will The Jobs Come From?” Kaufman Foundation Research Series: Firm Formation and
Economic Growth, November 2009, at http://www.kauffman.org/uploadedFiles/where_will_the_jobs_come_from.pdf;
John Haltiwanger, Ron S Jarmin, and Javier Miranda, “Who Creates Jobs? Small vs. Large vs. Young,” Cambridge,
MA: National Bureau of Economic Research, Working Paper 16300, August 2010, at http://www.nber.org/papers/
w16300; and Ian Hathaway, “Small Business and Job Creation: The Unconventional Wisdom,” Bloomberg
Government, October 31, 2011.
3 P.L. 83-163, the Small Business Act of 1953, Section 202.
4 U.S. Small Business Administration, “SBA’s Size Standards Analysis: An Overview on Methodology and
Comprehensive Size Standards Review,” power point presentation, Khem R. Sharma, SBA Office of Size Standards,
July 13, 2011, p. 4, at http://www.actgov.org/sigcom/SIGs/SIGs/SBSIG/Documents/2011%20-
%20Documents%20and%20Presentations/Size%20Stds%20Presentation_SIG%20Meeting.pdf.
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congressional interest in job creation, this report examines the potential consequences of targeting
SBA assistance to a narrower group, small businesses that are the most likely to create and retain
the most jobs.
In addition, the Government Accountability Office (GAO) has argued that the SBA’s program
performance measures provide limited information about the impact of its programs on
participating small businesses because those measures focus primarily on output, such as the
number of loans approved and funded, rather than outcomes, such as how well the small
businesses do after receiving SBA assistance.5 Given congressional interest in job creation, this
report examines the potential consequences of adding net job creation as an SBA program
performance measure.
This report also examines the arguments for providing federal assistance to small businesses,
noting that policymakers often view job creation as a justification for such assistance whereas
economists argue that over the long term federal assistance to small businesses is likely to
reallocate jobs within the economy, not increase them. Nonetheless, most economists support
federal assistance to small businesses for other purposes, such as a means to correct a perceived
market failure related to the disadvantages small businesses experience when attempting to access
capital and credit.
Economic Research on Net Job Creation
The following sections provide an assessment of employment dynamics in the United States,
starting with the latest economic data available concerning small and large employer firms,
employer firm startups, and employer firm non-startups. The relative employment effect of firms
by their size (small employer firms compared with large employer firms), age (startup employer
firms compared with non-startup employer firms of varying ages), and a combination of size and
age (startup employer firms of various employment sizes and ages compared with non-startup
employer firms of various sizes and ages) are also examined.
Small and Large Employer Firms
Current economic research indicates that there are approximately 28.4 million businesses in the
United States, including 22.7 million non-employer (self-employed) firms and about 5.7 million
firms with employees.6 As shown in Table 1, in 2012 (the most recent available data), most
employer firms (5,130,348 or 89.6%) had fewer than 20 employees, a relatively small number of
employer firms (577,593 or 10.1%) had 20-499 employees, and relatively few employer firms
(18,219 or 0.3%) had 500 or more employees. Overall, 99.7% (5,707,941) of all employer firms
had fewer than 500 employees—the generally accepted number of employees for a business to be
considered small for research purposes. Table 1 (which excludes the self-employed) also shows
that employer firms with fewer than 20 employees provided about 17.6% of all jobs, employer
5 U.S. Government Accountability Office, Small Business Administration: 7(a) Loan Program Needs Additional
Performance Measures, GAO-08-226T, November 1, 2007, pp. 2, 7-9, at http://www.gao.gov/new.items/d08226t.pdf.
6 U.S. Census Bureau, “Statistics of U.S. Businesses: U.S. & States, totals,” at http://www.census.gov/econ/susb/
index.html; and U.S. Census Bureau, “Nonemployer Statistics,” at http://censtats.census.gov/cgi-bin/nonemployer/
nonsect.pl. There are approximately 7.4 million establishments.
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firms with 20-499 employees provided about 30.8% of all jobs, and employer firms with 500 or
more employees provided about 51.6% of all jobs. Overall, employer firms with fewer than 500
employees provided almost half (48.4%) of all jobs.
Table 1. Employer Firms, Number and Employment, by Firm Size, 2012
Share of All
# of
Share of All
Average # of
Firm Size
# of Firms
Firms
Employees
Employees
Employees
Fewer than 20
5,130,348 89.6% 20,408,789 17.6%
4.0
Employees
20-499
577,593 10.1% 35,654,104 30.8%
61.7
Employees
500+
18,219 0.3%
59,875,575 51.6% 3,286.4
Employees
Al
Firms
5,726,160 100.0% 115,938,468 100.0%
20.2
Source: U.S. Bureau of the Census, “Statistics of U.S. Businesses: Latest SUSB Annual Data, 2012, U.S. & States
Totals,” at http://www.census.gov/econ/susb/.
Startups and Non-startup Employer Firms
As shown in Table 2, from 2005 to 2011 (the most recent available data), the number of
employer firm startups remained fairly constant from 2005 to 2007 (644,122 in 2005; 670,058 in
2006; and 668,395 in 2007), declined in 2008 (597,074) and 2009 (518,500), and increased
somewhat in 2010 (533,945) and 2011 (534,907). The number of employer firm non-startups
remained fairly constant from 2005 to 2008 (5.33 million in 2005; 5.35 million in 2006; 5.38
million in 2007; and 5.33 million in 2008), and declined somewhat in 2009 (5.24 million), 2010
(5.20 million), and 2011 (5.14 million). Over that time period, in any given year, startups
accounted for between 9.0% and 11.1% of all employer firms.
Table 2. Number of Employer Firms, by Startups and Non-startups, 2005-2011
Share of Employer
# of Employer
# of Employer
Total # of
Firms that are
Year
Firm Startups
Firm Non-startups
Employer Firms
Startups
2005 644,122 5,339,424 5,983,546 10.8%
2006 670,058 5,352,069 6,022,127 11.1%
2007 668,395 5,381,260 6,049,655 11.0%
2008 597,074 5,333,058 5,930,132 10.1%
2009 518,500 5,248,806 5,767,306 9.0%
2010 533,945 5,200,593 5,734,538 9.3%
2011 534,907 5,149,517 5,684,424 9.4%
Total 4,167,001
37,004,727 41,171,728 10.1%
Source: U.S. Bureau of the Census, “Statistics of U.S. Businesses: Latest SUSB Annual Data, 2009, U.S. & States
Totals,” November 2011, at http://www.census.gov/econ/susb/historical_data.html; U.S. Bureau of the Census,
“Statistics of U.S. Businesses: Latest SUSB Annual Data, 2010, U.S. & States Totals,” October 2012, at
http://www.census.gov/econ/susb/; U.S. Bureau of the Census, “Statistics of U.S. Businesses: Latest SUSB Annual
Data, 2011, U.S. & States Totals,” June 2014, at http://www.census.gov/econ/susb/; and U.S. Small Business
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Administration, “Statistics of U.S. Businesses, U.S. Dynamic Data, U.S. Data: Employer Firm Births and Deaths by
Employment Size of Firm, 1989-2011,” at http://www.sba.gov/advocacy/849/12162.
As shown in Table 3, overall net employment was positive from 2005 to 2008, negative in 2009
and 2010, and positive in 2011. The number of jobs created by startups remained fairly stable
from 2005 to 2007 (3.60 million in 2005, 3.68 million in 2006, and 3.55 million in 2007),
declined somewhat in 2008 (3.37 million jobs), declined further in 2009 (2.69 million jobs),
stabilized in 2010 (2.69 million jobs), and declined somewhat in 2011 (2.61 million jobs).
The net employment effect of non-startup employer firms (number of jobs created minus the
number of jobs destroyed through firm contractions and firm deaths) was negative throughout the
period, with some improvement in 2006 from 2005, relatively large employment losses in 2009
and 2010, and some improvement in 2011.
Overall, from 2005 through 2011, startups created about 22.2 million jobs and non-startups
destroyed approximately 24.2 million jobs, for a net change in employment of about 2.0 million
fewer jobs.
Table 3. Employment Effect of Employer Firm Startups and Non-startup Expansions,
Contractions, and Deaths, 2005-2011
# of Jobs
# of Jobs
(destroyed)
# of Jobs
Net
# of Jobs
Created by
by Non-
(destroyed)
Employment
Created by Non-startup
startup
by Non-
Effect from
Employer
Employer
Employer
startup
Non-startup
Overall Net
Firm
Firm
Firm
Employer
Employer
Employment
Year
Startups
Expansions
Contractions Firm Deaths
Firms
Effect
2005 3,609,285
13,970,562
(13,031,004)
(3,307,415)
(2,367,857) 1,241,428
2006 3,682,455
15,210,462
(12,074,631)
(3,219,966) (84,135) 3,598,320
2007 3,554,300
16,100,255
(15,635,492)
(3,481,861)
(3,017,098) 537,202
2008 3,376,055
11,885,005
(11,708,855)
(3,413,379)
(3,237,229) 138,826
2009 2,696,829 10,967,954 (16,577,673) (3,458,848) (9,068,567) (6,371,738)
2010 2,697,105 11,132,049 (13,507,078) (2,857,218) (5,232,247) (2,535,142)
2011 2,619,013
12,367,780
(10,948,143)
(2,613,790)
(1,194,153) 1,424,860
Total 22,235,042 91,634,067 (93,482,876)
(22,352,477) (24,201,286) (1,966,244)
Source: U.S. Small Business Administration, “Statistics of U.S. Businesses, U.S. Dynamic Data, U.S. Data:
Employer Firm Births and Deaths by Employment Size of Firm, 1989-2011,” at http://www.sba.gov/advocacy/849/
12162.
Startups by Firm Size
As shown in Table 4, from 2005 to 2011, most startups began with fewer than 20 employees
(3,993,133 of 4,167,001 startups, or 95.83%), relatively few startups began with 20-499
employees (172,595 of 4,167,001 or 4.14%), and very few startups began with 500 or more
employees (1,273 of 4,167,001 or 0.03%). Overall, from 2005 to 2011, 99.97% of all startups
(4,165,728 of 4,167,001) began with fewer than 500 employees.
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Table 4. Employer Firm Startups, Number and Employment, By Firm Size,
2005-2011
Share of All
# of Startup
Share of All
# of
Startup
Average # of
Startup Size
Firms
Startup Firms
Employees
Employees
Employees
Fewer than 20
3,993,133 95.83% 12,386,815 55.71%
3.1
Employees
20-499
172,595 4.14% 8,229,742 37.01% 47.7
Employees
500+
1,273 0.03% 1,618,742 7.28% 1,271.6
Employees
All Startup
4,167,001 100.00% 22,235,042 100.00%
5.3
Firms
Source: U.S. Small Business Administration, “Statistics of U.S. Businesses, U.S. Dynamic Data, U.S. Data:
Employer Firm Births and Deaths by Employment Size of Firm, 1989-2011,” at http://www.sba.gov/advocacy/849/
12162.
Table 4 also shows that, from 2005 to 2011, startups with fewer than 20 employees provided
more than half (55.71%) of all startup created jobs, startups with 20-499 employees provided
37.01% of all startup created jobs, and startups with 500 or more employees provided 7.28% of
all startup created jobs. Overall, startups with fewer than 500 employees provided 92.72% of all
startup created jobs from 2005 to 2011.
The Role of Small Business and Startups in Net Job Creation
Until recently, the prevailing view among economists was that although small businesses, defined
as firms with fewer than 500 employees, and large businesses “provide roughly equivalent shares
of jobs, the major part of job generation and destruction takes place in the small firm sector, and
small firms provide the greater share of net new jobs.”7 For example, in 2010, an SBA study
found that over the previous 15 years small businesses accounted for about 65% of private-sector
net job creation.8
However, as the availability of data concerning the life cycle of firms and establishments (which
may include outlets of large firms) has improved, and the number of studies examining the
relationship between job creation and business size has increased, the prevailing view that small
businesses, as a whole, are responsible for the majority of net job creation has been challenged.9
7 Brian Headd, “An Analysis of Small Business and Jobs,” U.S. Small Business Administration, Office of Advocacy,
March 2010, p. 3, at http://archive.sba.gov/advo/research/rs359tot.pdf.
8 Ibid., p. 10. Net job creation refers to the net result of all hiring minus voluntary and involuntary separations.
9 For a discussion of the literature on job creation by small businesses see CRS Report R41392, Small Business and the
Expiration of the 2001 Tax Rate Reductions: Economic Issues, by Jane G. Gravelle and Sean Lowry. A firm “is a
business organization consisting of one or more domestic establishments in the same state and industry that were
specified under common ownership or control.” An establishment is a “single physical location where business is
conducted or where services or industrial operations are performed.” It is not necessarily identical with a company or
enterprise, which may consist of one or more establishments. When two or more activities are carried on at a single
location under a single ownership, all activities generally are grouped together as a single establishment. The entire
establishment is classified on the basis of its major activity and all data are included in that classification. See U.S.
Bureau of the Census, “Statistics of U.S. Businesses: Definitions,” at http://www.census.gov/econ/susb/
(continued...)
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For example, some researchers have found considerable variation in the role of small businesses
in net job creation across different time periods. In some time intervals, small businesses
accounted for virtually all job growth and in others they accounted for about the same proportion
of new jobs as their share of existing jobs.10
Some researchers have also argued that the role of small businesses in net job creation is
overstated because most new jobs are created by new businesses and most new businesses
(startups) are small because the resources needed to launch larger businesses are relatively
difficult to obtain. They argue that many startups (defined as businesses in operation for less than
a year), and the jobs they create, disappear within a few years.11 For example, several studies
have found that about 20% of all startups close in their first year, one-third close within two
years, and fewer than half of all startups are still in business after five years.12 Another study, an
analysis of job creation in the United States from 1994 to 2006, found that startups with fewer
than 20 employees had “a strong positive initial effect” on employment growth in the year the
business was formed, but that positive employment effect decreased over time and was negligible
after six years.13
However, that study also found that startups with 20-499 employees had a positive employment
effect that increases after its first year in operation, reaches a maximum after five years, and then
moderates. The positive employment effect from these firms continued to remain positive over
the entire time period studied (1994-2006). The authors asserted that these larger small businesses
were “able to increase their level of productivity sooner after entry” than startups with fewer than
20 employees “due to their size and preconditions,” such as better access to capital, and, as a
result, were in a better position to “challenge existing firms and increase the competitiveness of
surviving existing firms.”14
The study’s authors argued that their findings suggest that the age of a business is a more
important factor in understanding business employment dynamics than the size of a business:
Our findings emphasize the critical role played by startups in U.S. employment growth
dynamics. We document a rich “up or out” dynamic of young firms in the U.S. That is,
conditional on survival, young firms grow more rapidly than their more mature counterparts.
However, young firms have a much higher likelihood of exit so that the job destruction from
exit is also disproportionately high among young firms. More generally, young firms are
more volatile and exhibit higher rates of gross job creation and destruction….
(...continued)
definitions.html.
10 Charles Brown, James Hamilton, and James Medoff, Employers Large and Small (Cambridge: Harvard University
Press, 1990), pp. 21, 22. The researchers argued that the “wide swings” from one period to the next were due at least in
part to major shocks to specific industries, such as manufacturing, which are dominated by large businesses.
11 Ibid.
12 Dane Stangler and Robert E. Litan, “Where Will The Jobs Come From?” Kaufman Foundation Research Series:
Firm Formation and Economic Growth, November 2009, p. 5, at http://www.kauffman.org/uploadedfiles/
where_will_the_jobs_come_from.pdf; and Dane Stangler and Paul Kedrosky, “Neutralism and Entrepreneurship: The
Structural Dynamics of Startups, Young Firms, and Job Creation,” Kaufman Foundation Research Series: Firm
Formation and Economic Growth, September 2010, p. 5, at http://www.kauffman.org/uploadedfiles/firm-formation-
neutralism.pdf.
13 Zoltan Acs, William Parsons, and Spencer Tracy, “High-Impact Firms: Gazelles Revisited,” U.S. Small Business
Administration, Office of Advocacy, June 2008, pp. 13, 14, at http://archive.sba.gov/advo/research/rs328tot.pdf.
14 Ibid., p. 14.
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Understanding the process of job creation by private sector businesses requires
understanding this dynamic. Policies that favor various simply defined classes of businesses
(e.g., by size) and ignore this fundamental dynamic will likely have limited success.15
A recent study using U.S. Census Bureau employment data from 1998 to 2011 also found that the
age of a business is a more important factor in understanding business employment dynamics
than the size of a business. The study’s authors found that young firms, defined as firms in their
first two years of existence, have higher job creation and job destruction rates than older firms,
higher rates of net job creation than older firms, and exhibit significantly higher worker churning
(job switching) than older firms.16
In sum, the prevailing view of the economic literature concerning startups is that they have a
significant role in job creation because, by definition, they add jobs to the economy in their
founding year and, for the most part, are not old enough to eliminate them yet. However, the
positive effect of startups on net job creation diminishes over time because “most businesses start
small, stay small, and close just a few years after opening.”17
The Role of Surviving Startups in Net Job Creation
Several economic studies have argued that in any given year nearly all net job creation in the
United States since 1980 has occurred in businesses that are less than five years old.18 This would
seem to suggest that if the SBA were to target its resources to promote net job creation that it
would consider targeting those resources to small businesses that are less than five years old.
However, other studies have found that startups account for nearly all of the positive employment
effect of businesses that are less than five years old in any given year and, as mentioned
previously, the positive employment effect of startups diminishes over time.
For example, one study found that, in 2005, nearly all net job creation in that year came from
businesses that were less than six years old. However, when the employment effect of startups
was separated from the employment effect of businesses in operation for one to five years,
startups accounted for nearly all of that year’s net job creation and relatively young businesses (in
operation for one year to five years) accounted for most of that year’s job losses.19
15 John Haltiwanger, Ron S Jarmin, and Javier Miranda, “Who Creates Jobs? Small vs. Large vs. Young,” Cambridge,
MA: National Bureau of Economic Research, Working Paper 16300, August 2010, pp. 3, 30, at http://www.nber.org/
papers/w16300.
16 John Haltiwanger, Henry Hyatt, Erika McEntarfer, and Liliana Sousa, “Job Creation, Worker Churning, and Wages
at Young Businesses,” Kaufman Foundation Research Series: November 2012, p. 2, at http://www.kauffman.org/
uploadedfiles/bds_report_7.pdf.
17 Brian Headd, “An Analysis of Small Business and Jobs,” U.S. Small Business Administration, Office of Advocacy,
March 2010, p. 7, at http://archive.sba.gov/advo/research/rs359tot.pdf.
18 Dane Stangler and Robert E. Litan, “Where Will The Jobs Come From?” Kaufman Foundation Research Series:
Firm Formation and Economic Growth, November 2009, p. 4, at http://www.kauffman.org/uploadedfiles/
where_will_the_jobs_come_from.pdf; and Dane Stangler and Paul Kedrosky, “Neutralism and Entrepreneurship: The
Structural Dynamics of Startups, Young Firms, and Job Creation,” Kaufman Foundation Research Series: Firm
Formation and Economic Growth, September 2010, pp. 2, 8, at http://www.kauffman.org/uploadedfiles/firm-formation-
neutralism.pdf.
19 Scott Shane, “Entrepreneurial Job Creation Statistics are Economic Rorschach Test,” Economic Trends, March 15,
2010, at http://smallbiztrends.com/2010/03/entrepreneurial-job-creation-statistics-are-an-economic-rorschach-test.html.
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Another study found that startups accounted for a significant number of new jobs, but that “the
bulk of job flows take place in existing firms’ expansions and contractions” (see Table 3).20 The
study also found that continuing firms accounted for 69% of the net jobs created from 1993 to
mid-2008 and firm turnover (firm births minus deaths) accounted for 31% of the net jobs created
over that time period.21
A 2010 study examined the employment effect of employer firms from 1977 to 2005 as they aged
from birth to year five. The study found that, overall, relatively young businesses (in operation for
one year to five years) are net job destroyers, but that the net job creation among surviving firms
over the first five years of their existence was able to partially balance out the jobs lost by failed
and shrinking businesses that started in the same year that they did.22 The study found that
although about half of all firms fail within five years “when a given cohort of startups reaches age
five, their employment level is 80% of what it was when it began.”23 The authors argued that their
findings suggest that “it is true that new startups matter” in net job creation even though “many
firms fail in their first few years,” but that “if we are looking for employment that lasts” it is the
surviving startups that “are vital.”24
Another study examined the shares of net job creation, in 2007, from businesses of different ages
in an attempt to isolate the contribution of businesses that have survived for at least one year. The
study found that net job creation, in 2007, came primarily from three sources: startups, surviving
young businesses (in operation for one to five years), and the oldest (and largest) surviving
businesses (in operation for more than 28 years). They found relatively little net job creation, in
2007, from businesses that were in operation for at least 6 years but less than 28 years.25 The
authors called this a “barbell effect, with job creation occurring at the youngest and oldest ends of
the firm age spectrum, and mostly flat in between.”26
The authors noted that they were unable to break out the effects of mergers and acquisitions on
their findings, but that they suspected the net addition of jobs in the oldest (and largest)
businesses came primarily from the acquisition of younger businesses that “pioneer innovations”
that create jobs.27 The authors also found “very little relationship” between the amount of small
business employment in an industry and that industry’s job growth. They did find what they
termed “an incredibly tight relationship” between any particular industry’s job growth and the
performance of young businesses (less than six years old) within that industry. They concluded
that this relationship suggested that “young companies are the engines of job creation.”28
20 Brian Headd, “An Analysis of Small Business and Jobs,” U.S. Small Business Administration, Office of Advocacy,
March 2010, pp. 8, 9, at http://archive.sba.gov/advo/research/rs359tot.pdf.
21 Ibid., pp. 9, 10.
22 Michael Horrell and Robert Litan, “After Inception: How Enduring is Job Creation by Startups?” Kaufman
Foundation Research Series: Firm Formation and Economic Growth, July 2010, p. 5, at http://www.kauffman.org/
uploadedFiles/firm-formation-inception-8-2-10.pdf.
23 Ibid., pp. 4, 8-10.
24 Ibid., p. 10.
25 Dane Stangler and Robert E. Litan, “Where Will The Jobs Come From?” Kaufman Foundation Research Series:
Firm Formation and Economic Growth, November 2009, pp. 6-7, at http://www.kauffman.org/uploadedFiles/
where_will_the_jobs_come_from.pdf.
26 Ibid., p. 5.
27 Ibid., p. 10.
28 Ibid., p. 8.
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A study using Census Bureau employment data from 1980 to 2009 reached a similar conclusion.
The study’s author found that “young businesses, not necessarily small businesses, are
responsible for the substantial majority of net job creation in the U.S. economy.”29 Also, another
study, using Census Bureau employment data from 1998 to 2011, found that young firms, defined
as employers in the first two years of existence, had much higher job creation rates than older
firms, higher job destruction rates than older firms, and, overall, higher net job creation rates than
older firms. Specifically, the study’s authors found that “for the youngest firms, the net job
creation rate in [economic] booms exceeds 10% and, even in the recent recession, exceeded 6%.
In contrast, the net job creation rates for mature businesses are positive in [economic] booms and
negative in recessions.”30
The finding that “young companies are the engines of job creation” seems to contradict the
previously mentioned finding that businesses between the ages of one year and five years are net
job destroyers.31 Both findings are supported by empirical evidence. The explanation for the
different findings is largely due to the way the studies treat the role of startups in net job creation.
If the job creation that occurs from startups is excluded from the analysis, then the evidence
seems to suggest that older businesses have a larger role in net job creation than younger
businesses. If the job creation that occurs from startups is included in the analysis, then the
evidence seems to suggest that younger businesses have a larger role in net job creation than older
businesses.32 Also, as mentioned previously, if the analysis focuses on business survivors, then the
evidence seems to suggest that the “barbell effect” takes place, with younger businesses and
much older (and larger) businesses having a larger role in net job creation than businesses that are
in operation for at least 6 years but less than 28 years.33
The Role of High-Impact Businesses in Net Job Creation
Because most small businesses start and remain small, some economists have focused their
research on the role of what the SBA and others refer to as “high-impact” businesses (sometimes
referred to as gazelles), instead of the relative roles of small versus large businesses, in job
29 Ian Hathaway, “Small Business and Job Creation: The Unconventional Wisdom,” Bloomberg Government, October
31, 2011.
30 John Haltiwanger, Henry Hyatt, Erika McEntarfer, and Liliana Sousa, “Job Creation, Worker Churning, and Wages
at Young Businesses,” Kaufman Foundation Research Series: November 2012, p. 2, at http://www.kauffman.org/
uploadedfiles/bds_report_7.pdf.
31 Dane Stangler and Robert E. Litan, “Where Will The Jobs Come From?” Kaufman Foundation Research Series:
Firm Formation and Economic Growth, November 2009, p. 8, at http://www.kauffman.org/uploadedFiles/
where_will_the_jobs_come_from.pdf; and Michael Horrell and Robert Litan, “After Inception: How Enduring is Job
Creation by Startups?” Kaufman Foundation Research Series: Firm Formation and Economic Growth, July 2010, p. 5,
at http://www.kauffman.org/uploadedFiles/firm-formation-inception-8-2-10.pdf. Also see Scott Shane, “To Create
Jobs, Help Existing Small Employers,” Bloomberg Businessweek, October 29, 2010, at http://www.businessweek.com/
smallbiz/content/oct2010/sb20101029_824099.htm.
32 Scott Shane, “Entrepreneurial Job Creation Statistics are Economic Rorschach Test,” Economic Trends, March 15,
2010, at http://smallbiztrends.com/2010/03/entrepreneurial-job-creation-statistics-are-an-economic-rorschach-test.html.
33 Dane Stangler and Robert E. Litan, “Where Will The Jobs Come From?” Kaufman Foundation Research Series:
Firm Formation and Economic Growth, November 2009, p. 5, at http://www.kauffman.org/uploadedFiles/
where_will_the_jobs_come_from.pdf. Also see John Haltiwanger, Ron S Jarmin, and Javier Miranda, “Who Creates
Jobs? Small vs. Large vs. Young,” Cambridge, MA: National Bureau of Economic Research, Working Paper 16300,
August 2010, p. 24, at http://www.nber.org/papers/w16300. They found that “conditional on survival, young firms
exhibit substantially higher growth than more mature firms.”
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creation.34 High-impact businesses are defined as having sales that have doubled over the most
recent four-year period and have an employment growth quantifier of two of more over the same
time period. The employment growth quantifier equals the product of a firm’s absolute change
and percent change in employment.35
High-impact businesses account for a relatively small percentage of businesses (typically 5% to
6% of all businesses with employees), yet account for “almost all [net] job creation in the
economy.”36
An analysis of employment in the United States from 1994 to 2006 found that there were 352,114
high-impact businesses during the 1994-1998 four-year time period, 299,973 during the 1998-
2002 four-year time period, and 376,605 during the 2002-2006 four-year time period.37 The study
found that high-impact businesses
• accounted for nearly all employment growth in the economy;
• came in all sizes (e.g., from 1994 to 2006, businesses with fewer than 20
employees accounted for 93.8% of high-impact businesses and 33.5% of job
growth among high-impact businesses; businesses with 20-499 employees
accounted for 5.9% of high-impact businesses and 24.1% of job growth among
high-impact businesses; and businesses with 500 or more employees accounted
for 0.3% of high-impact businesses and 42.4% of job growth among high-impact
businesses);
• existed in all regions, all states, and all counties;
• tended to be located in a metropolitan area (77.6% compared with 22.4% in a
rural area), and within 20 miles of a central business district (53.2%);
• existed in nearly all industries; and
• on average, were smaller and younger than other businesses, but “the average
high-impact business is not a startup and has been in operation for about 25
years.”38
The study’s authors argued that the presence of high-impact businesses in “virtually all”
industrial classifications throughout the 1994-2006 time period “suggests that economies that are
more diversified will grow more rapidly than ones that are more specialized” and “therefore,
encouraging diversity as a policy seems to make much more sense than targeting select
industries” for assistance.39
34 Zoltan Acs, William Parsons, and Spencer Tracy, “High-Impact Firms: Gazelles Revisited,” U.S. Small Business
Administration, Office of Advocacy, June 2008, at http://archive.sba.gov/advo/research/rs328tot.pdf. The term gazelles
was used to describe rapidly growing firms in David L. Birch and James Medoff, “Gazelles,” in Lewis C. Solmon and
Alec R. Levenson, eds., Labor Markets, Employment Policy and Job Creation (Boulder: Westview Press, 1994), pp.
159-168.
35 Zoltan Acs, William Parsons, and Spencer Tracy, “High-Impact Firms: Gazelles Revisited,” U.S. Small Business
Administration, Office of Advocacy, June 2008, pp. 1, 16, 17, at http://archive.sba.gov/advo/research/rs328tot.pdf.
36 Ibid., p. 3. This study includes a review of the economic literature on high-impact businesses. See ibid., pp. 4-12.
37 Ibid., p. 1.
38 Ibid., pp. 1-3, 36, 44.
39 Ibid., pp. 30-32.
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A follow-up study of high-impact businesses and their effect on net job creation in the United
States found that there were 368,262 high-impact businesses during the 2004-2008, four-year
time period, representing about 6.3% of all firms with employees.40 The study found that high-
impact businesses accounted for nearly all net employment growth during the 2004-2008 time
period, came in all sizes (95.3% had fewer than 20 employees, 4.5% had 20-499 employees, and
0.2% had 500 or more employees), existed in all regions and states, were relatively evenly
distributed across all industries, regardless of whether the industries were stagnant, growing, or
declining, and tended to be located in an urban area (85%).41
The study also found that high-impact businesses were, on average, younger than other
businesses across all three business size categories. Specifically, high-impact businesses with
fewer than 20 employees were, on average, in business for 17 years compared with 22 years for
other businesses with fewer than 20 employees. High-impact businesses with 20-499 employees
were, on average, in business for 25 years compared with 33 years for other businesses with 20-
499 employees. Also, high-impact businesses with 500 or more employees were, on average, in
business for 33 years compared with 51 years for other businesses with 500 or more employees.42
The study also found that high-impact businesses were more productive (as measured by revenue
per employee) than other businesses during the 2004-2008 time period, and the number of
women-owned high-impact businesses was proportionate to the number of women-owned non-
high-impact businesses.43
The Role of High-Technology Firms in Net Job Creation
Using Census Bureau employment data from 1980 to 2011, a 2013 Kauffman Foundation study
found that new businesses (aged one to five years) in 14 industries “with very high shares of
employees in the STEM fields of science, technology, engineering, and math … played an
outsized role in job creation” and while these industries were once relatively geographically
concentrated in just a few states they “are becoming increasingly geographically dispersed.”44
Hathaway, the study’s author, argued that most nascent entrepreneurs report that they are not
40 Spencer L. Tracy, Jr., “Accelerating Job Creation in America: The Promise of High-Impact Companies,” U.S. Small
Business Administration, Office of Advocacy, July 2011, p. 26, at http://www.sba.gov/sites/default/files/rs381tot.pdf.
41 Ibid., pp. 24-29, 43-46, 54. The study’s author noted that the finding that nearly 85% of all high-impact companies
are located in an urban area “is less compelling when considering that nearly 80% of all people in the U.S. reside in
urban areas.” See ibid., p. 29.
42 Ibid., pp. 38, 39.
43 Ibid., pp. 46-50.
44 Ian Hathaway, “Tech Starts: High-Technology Business Formation and Job Creation in the United States,” Kaufman
Foundation Research Series: Firm Formation and Economic Growth, August 2013, p. 2, at http://www.kauffman.org/~/
media/kauffman_org/research%20reports%20and%20covers/2013/08/bdstechstartsreport.pdf. The 14 industries
identified as having a high concentration of STEM employees, including their NAICS code, are: NAICS 3341,
computer and peripheral equipment manufacturing; NAICS 3342, communications equipment manufacturing; NAICS
3344, semiconductor and other electronic component manufacturing; NAICS 3345, navigational, measuring,
electromedical, and control instruments manufacturing; NAICS 5112, software publishers; NAICS 5161, internet
publishing and broadcasting; NAISC 5179, other telecommunications; NAICS 5181, internet service providers and web
search portals; NAICS 5182, data processing, hosting, and related services; NAICS 5415, computer systems design and
related services; NAICS 3254, pharmaceutical and medicine manufacturing; NAICS 3364, aerospace product and parts
manufacturing; NAICS 5413, architectural, engineering, and related services; and NAICS 5417, scientific research-
and-development services.
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interested in building “a high-growth business.”45 Instead, most nascent entrepreneurs report that
they plan to remain small and focus on providing an existing service to an existing customer base
rather than creating new services or building a new customer base.46 In contrast, he argued that
entrepreneurs in information and communications high-technology industries (such as
manufacturers of computer and peripheral equipment, communications equipment, and
semiconductor and other electronic equipment; software publishers; and internet service
providers) and in other high-technology industries (such as pharmaceutical and medicine
manufacturing; aerospace product and parts manufacturing; architectural, engineering, and related
services; and scientific research-and-development services) are more growth oriented and behave
differently than other entrepreneurs. He found that over the last three decades these 14 industries
had experienced rapid employment grown, even though they had experienced significant
employment losses during “the dot-com bust” in the early 2000s and “Great Recession of 2008
and 2009.”47 He noted that despite these downturns, surviving young firms in the 14 high-
technology industries provided net job creation rates “more than twice that of businesses across
the economy.”48 The author concluded his analysis by arguing that job creation and business
formation dynamics vary across industries and that “the next few years of data releases will
provide critical insights into the state of economic dynamism and entrepreneurship in the United
States.”49
Summary Discussion
Economic research on net job creation suggests that startups play a very important role in job
creation, but have a more limited effect on net job creation over time because about one-third of
all startups close by their second year of existence and fewer than half of all startups are still in
business after five years. However, that research also suggests that the influence of small startups
on net job creation varies by firm size. Startups with fewer than 20 employees tend to have a
negligible effect on net job creation over time while startups with 20-499 employees tend to have
a positive employment effect “that continued to increase for five years after their formation
before decreasing.”50 This finding would suggest that, if providing assistance to startups was used
as a factor in SBA program performance or in the distribution of SBA assistance, the startup’s
size should also be taken into consideration.
Economic research on net job creation also suggests that net job creation is concentrated among a
relatively small group of surviving “high-impact” businesses that are younger and smaller than
the typical business, but also have, on average, been in operation for 25 years. This finding
suggests that all three groups of businesses—startups, younger small businesses (in operation for
one year to five years), and high-impact businesses—are important contributors to net job
creation.
45 Ibid., p. 3.
46 Ibid.
47 Ibid., p. 6.
48 Ibid., p. 16.
49 Ibid., p. 17.
50 Zoltan Acs, William Parsons, and Spencer Tracy, “High-Impact Firms: Gazelles Revisited,” U.S. Small Business
Administration, Office of Advocacy, June 2008, p. 14, at http://archive.sba.gov/advo/research/rs328tot.pdf.
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In addition, recent economic research suggests that employment dynamics vary across U.S.
industries, with entrepreneurs in some industries providing a greater emphasis on employment
expansion than in other industries.
In sum, current economic research on the dynamics of net job creation does not provide a
definitive answer concerning how to identify those businesses that are most likely to contribute to
net job creation. However, that research does suggest that small business startups, especially
those with at least 20 employees, play a large role in net job creation, as do surviving younger
businesses (in operation for one year to five years). It does not, as of yet, provide criteria to
predict, with any degree of certainty, which of the surviving younger businesses will emerge as
high-impact businesses.
Implications for Congress and the SBA
The Small Business Act of 1953 (P.L. 83-163, as amended) authorized the SBA and justified the
agency’s existence on the grounds that small businesses were essential to the maintenance of the
free enterprise system:
The essence of the American economic system of private enterprise is free competition. Only
through full and free competition can free markets, free entry into business, and
opportunities for the expression and growth of personal initiative and individual judgment be
assured. The preservation and expansion of such competition is basic not only to the
economic well-being but to the security of this Nation. Such security and well-being cannot
be realized unless the actual and potential capacity of small business is encouraged and
developed. It is the declared policy of the Congress that the Government should aid, counsel,
assist, and protect insofar as is possible the interests of small-business concerns in order to
preserve free competitive enterprise, to insure that a fair proportion of the total purchases and
contracts for supplies and services for the Government be placed with small-business
enterprises, and to maintain and strengthen the overall economy of the Nation.51
In economic terms, the congressional intent was to use the SBA to deter the formation of
monopolies and the market failures they cause by eliminating competition in the marketplace.
The congressional emphasis on deterring monopoly formation could help to explain the SBA’s
historical reliance on factors related to promoting business competition within the various
industrial classifications, as opposed to using other factors—such as job creation, when
formulating its industry size standards.
The Small Business Act did not mention the SBA’s role in job creation. However, in 1954,
Wendell Barnes, the SBA’s second Administrator, was asked at a congressional hearing to
discuss the SBA’s role in supporting small businesses. He testified that part of the SBA’s mission
was to provide credit to small businesses to enable them to “provide additional employment.”52
For many years, economists and others have argued that providing federal assistance to small
businesses is justified because small businesses are perceived to be at a disadvantage, compared
51 P.L. 83-163, the Small Business Act of 1953, Section 202.
52 U.S. Congress, Senate Select Committee on Small Business, Small Business Administration Loan Policy, 83rd Cong.,
2nd sess., May 13, 1954 (Washington: GPO, 1954), p. 10.
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with other businesses, in accessing capital and credit.53 In their view, lenders are less likely to
lend to small businesses than to larger businesses because small businesses tend to be younger
and have less credit history than larger businesses.54 Also, lenders may also be reluctant to lend to
small businesses with innovative products because it might be difficult to collect enough reliable
information to correctly estimate the risk for such products.55 As GAO has reported:
Limited evidence from economic studies suggests that some small businesses may face
constraints in accessing credit because of imperfections such as credit rationing in the
conventional lending market. Some studies showed, for example, that lenders might lack the
information needed to distinguish between creditworthy and non-creditworthy borrowers and
thus could “ration” credit by not providing loans to all creditworthy borrowers. Several
studies we reviewed generally concluded that credit rationing was more likely to affect small
businesses, because lenders could face challenges obtaining enough information on these
businesses to assess their risk.56
Others have supported federal assistance to small businesses because they believe that small
business ownership provides an opportunity for minorities, women, and immigrants to increase
their income and independence and to move into the economic mainstream of the American
economy.57 In their view, businesses owned by these demographic groups face even greater
barriers in obtaining access to capital and credit than other small business owners due to
discrimination and their higher likelihood of locating their business in a low or moderate income
community. Operating a business in a low or moderate income community is often viewed by
lenders as increasing the risk that the business owner will be unable to repay the loan.58
In recent years, advocates of providing federal assistance to small businesses have focused
increased attention on the SBA’s role in job creation.59 For example, the SBA has argued that
53 For a discussion of the economic reasons for and against providing small businesses tax preferences see CRS Report
RL32254, Small Business Tax Benefits: Current Law and Main Arguments For and Against Them, by Gary Guenther.
54 U.S. Government Accountability Office, Small Business Administration: 7(a) Loan Program Needs Additional
Performance Measures, GAO-08-226T, November 1, 2007, pp. 3, 9-11, at http://www.gao.gov/new.items/d08226t.pdf;
and Veronique de Rugy, Why the Small Business Administration’s Loan Programs Should Be Abolished, Washington,
DC: American Enterprise Institute for Public Policy Research, AEI Working Paper #126, April 13, 2006,
http://www.aei.org/files/2006/04/13/20060414_wp126.pdf.
55 Veronique de Rugy, Why the Small Business Administration’s Loan Programs Should Be Abolished, Washington,
DC: American Enterprise Institute for Public Policy Research, AEI Working Paper #126, April 13, 2006, at
http://www.aei.org/files/2006/04/13/20060414_wp126.pdf.
56 U.S. Government Accountability Office, Small Business Administration: 7(a) Loan Program Needs Additional
Performance Measures, GAO-08-226T, November 1, 2007, pp. 3, 9-11, at http://www.gao.gov/new.items/d08226t.pdf.
57 Advocates of federal assistance for small businesses also argue that women-, minority-, and immigrant-owned small
businesses benefit their immediate communities and society at large in ways that go beyond direct economic effects.
For example, there is evidence that women small business owners are more likely than their male counterparts to
encourage openness in workplace communication and decision-making, hire a diverse workforce, put into place
desirable child-care programs, and pay full benefits to employees. See Candida Brush and Robert D. Hisrich, “Women-
Owned Businesses: Why Do They Matter?” in Are Small Firms Important? Their Role and Impact (Boston: Kluwer
Academic Publishers, 1999), pp. 111-127; and John Sibley Butler and Patricia Gene Greene, “Don’t Call Me Small:
The Contribution of Ethnic Enterprises to the Economic and Social Well-Being of America,” in Are Small Firms
Important? Their Role and Impact (Boston: Kluwer Academic Publishers, 1999), pp. 129-145.
58 Robert W. Fairlie and Alicia M. Robb, “Disparities in Capital Access between Minority and Non-Minority-Owned
Businesses: The Troubling Reality of Capital Limitations Faced by MBEs,” U.S. Department of Commerce, Minority
Business Development Agency, January 2010, pp. 3-5, 8, 17-23, at http://www.mbda.gov/sites/default/files/
DisparitiesinCapitalAccessReport.pdf.
59 For example, see The White House, “Remarks by the President on Job Creation and Economic Growth,” December
(continued...)
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“improving access to credit by small businesses is a crucial step in supporting economic recovery
and job creation.”60
Economists generally do not view job creation as a justification for providing federal assistance to
small businesses. They argue that in the long term such assistance will likely reallocate jobs
within the economy, not increase them. In their view, jobs arise primarily from the size of the
labor force, which depends largely on population, demographics, and factors that affect the choice
of home versus market production (e.g., the entry of women in the workforce). However,
economic theory does suggest that increased federal spending may result in additional jobs in the
short term. For example, the SBA reported in September 2010 that small business funding
provided by P.L. 111-5, the American Recovery and Reinvestment Act of 2009, created or
retained 785,955 jobs.61
The following sections examine the potential consequences of using net job creation as an SBA
program performance measure and for targeting SBA assistance. That assistance is currently
available to businesses that are located in the United States, are a for-profit operating business,
qualify as small under the SBA’s size requirements, and, for loan guarantees, demonstrate a need
for the desired credit and are certified by a lender that the desired credit is unavailable on
reasonable terms and conditions from non-federal sources without the SBA’s assistance.62 About
97% of all business concerns currently meet the SBA’s eligibility criteria.63
Using Net Job Creation to Measure SBA Program Performance
GAO has argued that the SBA’s program performance measures provide limited information
about the impact of its programs on participating small businesses because those measures focus
primarily on output, such as the number of loans approved and funded, rather than outcomes,
such as how well the small businesses do after receiving SBA assistance.64 GAO has
recommended that the SBA devise program performance measures based on outcomes to enable
(...continued)
8, 2009, at http://www.whitehouse.gov/the-press-office/remarks-president-job-creation-and-economic-growth.
60 U.S. Small Business Administration, “President Obama Announces New Efforts to Improve Access to Credit for
Small Businesses,” 2009, at http://www.sba.gov/idc/groups/public/documents/sba_homepage/
sba_rcvry_new_effort_credit_sb.pdf.
61 U.S. Small Business Administration, “FY2009/2010 Final – Recovery Program Performance Report, September
2010,” September, 2010, at http://archive.sba.gov/idc/groups/public/documents/sba_homepage/
perform_report_9_2010.pdf.
62 13 C.F.R. §120.100; 13 C.F.R. §120.101; and 13 C.F.R. §120.102. A list of ineligible businesses, such as non-profit
businesses, insurance companies, and businesses deriving more than one-third of gross annual revenue from legal
gambling activities, are contained in 13 C.F.R. §120.110. Also, borrowers can use Microloan proceeds for working
capital and acquisition of materials, supplies, furniture, fixtures, and equipment to establish nonprofit child care centers,
see 13 C.F.R. §120.707.
63 U.S. Small Business Administration, “SBA’s Size Standards Analysis: An Overview on Methodology and
Comprehensive Size Standards Review,” power point presentation, Khem R. Sharma, SBA Office of Size Standards,
July 13, 2011, p. 4, at http://www.actgov.org/sigcom/SIGs/SIGs/SBSIG/Documents/2011%20-
%20Documents%20and%20Presentations/Size%20Stds%20Presentation_SIG%20Meeting.pdf.
64 U.S. Government Accountability Office, Small Business Administration: 7(a) Loan Program Needs Additional
Performance Measures, GAO-08-226T, November 1, 2007, pp. 2, 7-9, at http://www.gao.gov/new.items/d08226t.pdf.
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Congress to determine “how well the agency is meeting its strategic goal of helping small
businesses succeed.”65
At least one economist has argued that Congress should consider “including performance
benchmarks in government loan programs” as “useful assessment tools for distinguishing
companies with exceptional capacities and promise” for economic growth and job creation.66
Under this proposal, the government’s guarantee would increase “to a ceiling in accordance with
the number of benchmarks an applicant satisfies, though meeting some base-level benchmarks
would be required of all applicants.”67
Congress has required the SBA to use outcome-based performance measures for some of its
programs. For example, borrowers in the SBA’s 504/CDC (Certified Development Company)
loan guaranty program, except small manufacturers, are required to create or retain at least one
job for every $65,000 of project debenture.68 Small manufacturers (defined as a small business
with its primary North American Industry Classification System Code in Sectors 31, 32, and 33,
and having all of its production facilities in the United States) must create or retain one job per
$100,000 of project debenture.69
The SBA also requires its management and technical assistance training program counselors to
report information concerning job creation and retention.70 In addition, as mentioned previously,
the SBA has released estimates of the number of jobs created and retained by its loan guaranty
programs as part of its implementation of P.L. 111-5, the American Recovery and Reinvestment
Act of 2009.71 The SBA’s Office of Advocacy also periodically commissions independent studies
of job creation and net job creation by small businesses to draw attention to “the contributions
and challenges of small businesses in the U.S. economy.”72
65 Ibid., p. 2.
66 Spencer L. Tracy, Jr., “Accelerating Job Creation in America: The Promise of High-Impact Companies,” U.S. Small
Business Administration, Office of Advocacy, July 2011, p. 55, at http://www.sba.gov/sites/default/files/rs381tot.pdf.
67 Ibid.
68 For further analysis of the 504/CDC program, see CRS Report R41184, Small Business Administration 504/CDC
Loan Guaranty Program, by Robert Jay Dilger.
69 U.S. Small Business Administration, “SOP 50 10 5(D): Lender and Development Company Loan Programs,”
(effective October 1, 2011), pp. 299, http://www.sba.gov/sites/default/files/SOP%2050%2010%205(D)%20(9-15-
11)%20clean_0.pdf. The jobs created do not have to be at the project facility, but 75% of the jobs must be created in
the community where the project is located. Using job retention to satisfy this requirement is allowed only if the
Certified Development Company (CDC) can reasonably show “that jobs would be lost to the community if the project
was not done.” The borrower can also retain eligibility by meeting any one of five specified community development
goals or 10 specified public policy goals, provided the CDC meets its required job opportunity average of at least one
job opportunity created or retained for every $65,000 in project debenture, or for every $75,000 in project debenture for
projects located in special geographic areas (Alaska, Hawaii, state-designated enterprise zones, empowerment zones,
enterprise communities, and labor surplus areas). Loans to small manufacturers are excluded from the calculation of
this average.
70 For further analysis of SBA management and technical assistance programs, see CRS Report R41352, Small
Business Management and Technical Assistance Training Programs, by Robert Jay Dilger.
71 U.S. Small Business Administration, “FY2009/2010 Final - Recovery Program Performance Report, September
2010,” September 2010, pp. 2, 3, at http://archive.sba.gov/idc/groups/public/documents/sba_homepage/
perform_report_9_2010.pdf.
72 U.S. Small Business Administration, Office of Advocacy, “About US,” at http://www.sba.gov/category/advocacy-
navigation-structure/about-us.
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Given increased congressional interest in job creation, it could be argued that using net job
creation as an outcome-based performance measure for the SBA’s programs might enhance
congressional oversight by providing Congress additional information concerning the nature of
the jobs created by the SBA’s programs, such as whether the jobs (and recipient small businesses)
last or disappear relatively soon.73 Congress could use this information to compare programs and
as a factor in its deliberations concerning SBA funding and priorities.
The counter-argument is that implementing net job creation as an SBA program performance
measure is not necessarily easy. For example, decisions would have to be made concerning how
to count part-time workers and seasonal workers, whether to take into account salaries and
benefits, how long to track the small business’s employment levels, how to keep reporting
requirements manageable for small business owners, and whether to rely on self-reporting,
independent consultants, or SBA staff to gather and verify the data. Economists might also argue
that using net job creation as an SBA program performance criteria is inappropriate because
economic theory suggests that in the long run such assistance does not create additional jobs, it
reallocates them within the economy. Some small businesses might also object, worried that the
use of net job creation as an SBA program performance measure might result in them receiving
less SBA assistance than they would otherwise receive.
Using Net Job Creation to Target SBA Assistance
Given increased congressional interest in job creation, it could be argued that using net job
creation as a factor in the targeting of the SBA’s assistance might enhance congressional efforts
to promote job growth. Job growth has been one of the top domestic priorities of recent
Congresses.
The counter-argument is that there is little evidence to prove that providing a subsidy to small
businesses that currently create the most jobs will be the most effective means of promoting job
growth. For example, it could be argued that successful small businesses may not need SBA
assistance because their success enables them to attract capital and credit from private sources.
Also, given the constantly evolving nature of the economy, the businesses that create the most
jobs in the economy change over time. The SBA would need to update its criteria periodically to
account for these changes.
It could also be argued that using net job creation as a factor in allocating SBA assistance is
premature because, given the evolving nature of the economic literature, there is no consensus
concerning the criteria that should be used to identify businesses that are the most likely to have a
positive effect on net job creation.
In addition, economists might oppose the use of net job creation to target SBA assistance for the
same reason they might oppose using net job creation as an SBA program performance
measure—because economic theory suggests that in the long run such assistance does not create
additional jobs, it reallocates them within the economy. Some small businesses might also object,
worried that using net job creation as a factor in allocating SBA assistance might eliminate or
reduce the SBA assistance that they would otherwise receive.
73 Using net job creation as a performance measure for the SBA’s disaster assistance loan program for individuals and
households (renters and property owners) to repair and replace homes and personal property following a disaster may
have limited utility because that program is not specifically designed to assist businesses.
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It could also be argued that the SBA already takes net job creation into account, at least to a
limited degree, in its loan guaranty programs. By guaranteeing less than 100% of the SBA loan
amount issued by private lenders, the SBA subjects lenders to losses on defaulted loans (ranging
from 10% to 50% of the loan amount depending on the SBA program). It could be argued that
lenders take into account the borrower’s likelihood of repayment (survival) and, therefore, the
borrower’s potential for having a positive effect on net job creation, before issuing an SBA
guaranteed loan to protect its financial investment. As a result, the lending process, arguably,
helps to weed out those firms that are most likely to have a negative effect on net job creation.
However, it could also be argued that because lenders are required to certify that the desired
credit is unavailable to the applicant on reasonable terms and conditions from non-federal sources
without the SBA’s assistance, SBA borrowers are, by definition, at greater risk of failing than
others and, therefore, are also less likely than others to have a positive effect on net job creation.
It could also be argued that the SBA’s Small Business Investment Company (SBIC) program
already takes net job creation into account, at least indirectly.74 Under the SBIC program, the
SBA guarantees debentures (loan obligations) that are sold to investors. The revenue generated by
the sale of the debenture is then invested by certified small business investment companies in
small businesses. When making those investments, small business investment companies take
into account many factors, including the business’s potential for economic growth. As a result, it
could be argued that the SBIC program takes into account the borrower’s likelihood of having a
positive effect on net job creation and, unlike the SBA’s loan guaranty programs, does not have to
certify that the desired credit is unavailable to the applicant on reasonable terms and conditions
from non-federal sources without the SBA’s assistance. The counter-argument is that the SBIC
program is much smaller than the SBA’s business loan guaranty programs (e.g., the SBA
guarantees between $2 billion and $3 billion in SBIC debentures annually compared with more
than $20 billion in business loan guarantees) and the SBA does not use net job creation as a
primary factor in allocating those resources.
Finally, it could be argued that using net job creation as a factor in the allocation of SBA
assistance will not have much effect on net job creation because the SBA’s loan programs
represent a relatively small share of the capital accessed by small businesses in any given year.
Following this line of argument, it could be argued that a more effective strategy for promoting
job creation would be to focus on policies affecting the broader economy rather than the SBA.
Concluding Observations
Economic research on net job creation suggests that startups play a very important role in job
creation, but have a more limited effect on net job creation over time because about one-third of
all startups close by their second year of existence and fewer than half of all startups are still in
business after five years. However, economic research also suggests that the influence of small
startups on net job creation varies by firm size. Startups with fewer than 20 employees tend to
have a negligible effect on net job creation over time whereas startups with 20-499 employees
tend to have a positive employment effect “that continued to increase for five years after their
formation before decreasing.”75 This finding would suggest that, if providing assistance to
74 For further analysis of the Small Business Investment Company Program, see CRS Report R41456, SBA Small
Business Investment Company Program, by Robert Jay Dilger.
75 Zoltan Acs, William Parsons, and Spencer Tracy, “High-Impact Firms: Gazelles Revisited,” U.S. Small Business
(continued...)
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startups was used as a factor in SBA program performance or in the distribution of SBA
assistance, the startup’s size should also be taken into consideration.
The economic research on net job creation also suggests that net job creation is concentrated
among a relatively small group of surviving “high-impact” businesses that are younger and
smaller than the typical business, but also have, on average, been in operation for 25 years. This
finding suggests that all three groups of businesses—startups, young small businesses (in
operation for one year to five years), and surviving high-impact businesses—are important
contributors to net job creation.
As mentioned previously, recent economic research suggests that employment dynamics vary
across U.S. industries, with entrepreneurs in some industries providing a greater emphasis on
employment expansion than entrepreneurs in other industries.
In sum, economic research on the dynamics of net job creation does not provide a definitive
answer concerning how to identify those businesses that are most likely to contribute to net job
creation. However, that research does suggest that small business startups, especially those with
at least 20 employees, play a large role in net job creation, as do surviving younger businesses (in
operation for one year to five years). The economic literature does not, as of yet, provide criteria
to predict, with any degree of certainty, which of the surviving younger businesses will emerge as
high-impact firms. Nonetheless, given the heightened congressional interest in net job creation,
increased attention to the fact that the SBA is not specifically designed to promote net job
creation and does not use net job creation as a program performance measure may lead to
additional analysis that can better inform the debate over whether the SBA should use net job
creation as an outcome-based program performance measure or as a factor in the allocation of its
assistance.
Author Contact Information
Robert Jay Dilger
Senior Specialist in American National Government
rdilger@crs.loc.gov, 7-3110
(...continued)
Administration, Office of Advocacy, June 2008, p. 14, at http://archive.sba.gov/advo/research/rs328tot.pdf.
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