Small Business Administration and Job Creation

January 30, 2013 – January 4, 2022 R41523

Small Business Administration and
Job Creation
Updated January 4, 2022
Congressional Research Service
https://crsreports.congress.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. Congress has always been
interested in these programs, primarily because they are viewed as a means to stimulate economic
activity and create jobs. That interest has become acute in recent months due to the adverse
economic impact of the Coronavirus Disease 2019 (COVID-19) pandemic on the national
economy, particularly on smal businesses.
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 indicates that smal businesses tend to create
more jobs than large businesses during economic expansions and lose more jobs during and
immediately following recessions.
Economic research also 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 al startups are
stil in business after five years. However, the influence of smal 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 al sizes (in operation for one
year to five years).
This report examines the possible implications this research might have for Congress and the
SBA. For example, although the current focus is on job retention and assisting as many small
businesses as possible that have been adversely affected by the COVID-19 pandemic, this report
examines the potential consequences of targeting SBA non-COVID-19-related lending assistance
to 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 wel the smal 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 smal 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.
Congressional Research Service

Small Business Administration and Job Creation

Small Business and Net Job Creation
The Smal Business Administration (SBA) administers several programs to support smal
businesses, including loan guaranty and venture capital programs to enhance smal business
access to capital; contracting programs to increase smal business opportunities in federal
contracting; direct loan programs for businesses, homeowners, and renters to assist their recovery
from natural disasters; and smal business management and technical assistance training programs
to assist business formation and expansion.1 Congress has always shown an interest in the SBA’s
programs, primarily because they are viewed as a means to stimulate economic activity and create
jobs.2 That interest has become acute in recent months given the widespread adverse economic
impact of the Coronavirus Disease 2019 (COVID-19) pandemic on the national economy,
particularly on smal businesses. For example, legislation has been enacted that has dramatical y
expanded the SBA’s authority to provide general business and disaster loans to smal businesses
adversely affected by COVID-19.3
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 al startups are stil in business after five
years. However, the influence of smal 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 al sizes (in operation for one year to five years).4

1 For further information and analysis of the SBA’s loan guaranty and venture capital programs, see CRS Report
R41146, Sm all Business Adm inistration 7(a) Loan Guaranty Program , by Robert Jay Dilger; CRS Report R41184,
Sm all Business Adm inistration 504/CDC Loan Guaranty Program , by Robert Jay Dilger; CRS Report R41057, Sm all
Business Adm inistration Microloan Program , by Robert Jay Dilger; and CRS Report R41456, SBA Sm all Business
Investm ent Com pany Program , by Robert Jay Dilger. For further information and 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 information and analysis of the SBA’s contracting programs, see CRS Report R45576,
An Overview of Sm all Business Contracting, by Robert Jay Dilger.
2 SBA, “Fiscal Year 2022 Congressional Budget Justification and FY2020 Annual Performance Report,” pp. 4, 27, at
https://www.sba.gov/document/report -congressional-budget-justification-annual-performance-report.
Isolating the firm-level impact of SBA loans on job creation is a daunting methodological challenge because (1) many
factors influence employment and economic gro wth, (2) SBA loans represent a relatively small portion of the local
economy, (3) “loan receipt may be subject to selection bias (positive or negative), and (4) appropriate firm -level
microdata have usually been unavailable.” Also, SBA lending’s impact on employment “may be attenuated if the
program crowds out other sources of capital, and the aggregate effect may be reduced if there are general equilibrium
displacement effects (negative spillovers onto competing firms).” See J. David Brown and John S. Earle, “Finance and
Growth at the Firm Level: Evidence from SBA Loans,” The Journal of Finance Vol. LXXII, No. 3, June 2017, p. 1040.
Using econometric statistical analysis, the authors also linked SBA loans issued from 1992 through the third quarter of
2009, to the Census Bureau’s employer and nonemployer registers, which include data on firm employment, annual
payroll, establishment age, and other economic characteristics. T heir analysis found that SBA loans led to an increase
of 3-3.5 jobs in the first three years after loan receipt for each million dollars of loans.
3 For additional information and analysis, see CRS Report R46284, COVID-19 Relief Assistance to Small Businesses:
Issues and Policy Options, by Robert Jay Dilger, Bruce R. Lindsay, and Sean Lowry .
4 Zoltan Acs, William Parsons, and Spencer T racy, “High-Impact Firms: Gazelles Revisited,” SBA, Office of
Advocacy, June 2008, at https://ntrl.ntis.gov/NTRL/dashboard/searchResults/titleDet ail/PB2008109311.xhtml
(hereafter Acs, Parsons, and T racy, 2008); Dane Stangler and Robert E. Litan, “ Where Will T he Jobs Come From?”
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This information’s possible implications for Congress and the SBA are then examined. For
example, although the current focus is on job retention and assisting as many small businesses as
possible that have been adversely affected by the COVID-19 pandemic, this report examines the
potential consequences of targeting SBA non-COVID-19-related lending assistance to small
businesses that are the most likely to create and retain the most jobs. About 97% of all business
concerns currently meet the SBA’s small business eligibility criteria for non-COVID-19-related
lending assistance.5
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 smal businesses because those measures focus primarily on output, such as the
number of loans approved and funded, rather than outcomes, such as how wel the smal
businesses do after receiving SBA assistance.6 Given congressional interest in job creation, this
report examines the potential consequences of adding net job creation as a 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 from the U.S. Bureau of the Census concerning
the number and employment of smal and large enterprises, establishments, and firms (smal is
defined here as having fewer than 500 employees and large as having 500 or more employees).
This is followed by assessments of job gains and losses (sometimes referred to as “churning”) by
smal and large establishments (including opening/startup establishments) using data available
from the U.S. Department of Labor’s Bureau of Labor Statistics (BLS).7
Assessments of employment dynamics usual y examine the employment decisions of
establishments, firms, and/or enterprises. An establishment “is a single physical location where
one predominant activity occurs.”8 A firm “is an establishment or a combination of

Kaufman Foundation Research Series: Firm Formation and Economic Growth, November 2009, at
http://www.kauffman.org/-/media/kauffman_org/research-reports-and-covers/2009/11/
where_will_the_jobs_come_from.pdf (hereafter Stangler and Litan, 2009); 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: T he Unconventional Wisdom,” Bloomberg Government, October 31, 2011.
5 SBA, “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.wcoeusa.org/sites/default/files/Size%20 Standards%20Methodology%20from%20SBA.pdf.
6 U.S. Government Accountability Office, Small Business Administration: 7(a) Loan Program Needs Additional
Perform ance Measures, GAO-08-226T , November 1, 2007, pp. 2, 7 -9, at http://www.gao.gov/new.items/d08226t.pdf.
7 Bureau of Labor Statistics, “Research Data on Business Employment Dynamics by Age and Size,” at
https://www.bls.gov/bdm/business-employment -dynamics-data-by-age-and-size.htm.
8 Akbar Sadeghi, David M. T alan, and Richard L. Clayton, “Establishment, firm, or enterprise: does the unit of analysis
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establishments” and is often “defined by its unique Employer Identification number (EIN) issued
by the Internal Revenue Service (IRS).”9 An enterprise “is a firm or a combination of firms that
engages in economic activities which are classified into multiple industries. An enterprise may
report under one or a number of EINs.”10
Each of these units of analysis provide information that is useful for understanding employment
dynamics. As the BLS explains:
The perception is that multiunit businesses act as a whole rather than as a collection of
individual establishments. On the one hand, it could be that larger multiunit businesses
make more unified decisions to control hiring, close a plant or store, or lay off workers
during economic downturns. This argument supports the use of a higher level of
aggregation than the establishment level. On the other hand, businesses might make such
decisions on the basis of each establishment’s profitability, product line, and longer term
prospects for contributions to the overall business. Why restrict hiring at a fu lly profitable
and growing location when other locations are suffering from insufficient demand? In this
case, the firm may act more like a set of individual establishments rather than a unified set
of establishments.11
General y speaking, “the net employment change remains the same for al levels of aggregation,
but the magnitude of gross job flows varies with the unit of analysis chosen.”12 There is “a higher
level of churning when job flows are estimated at a lower level of aggregation (the
establishment)” and a lower level of churning “at a higher level of aggregation (the enterprise or
firm) [because] expansions in some units offset contractions in other units, leaving job flows at a
lesser magnitude.”13
Small and Large Business Employment
In 2019 (the most recent available data), there were 5.77 million nonfarm employer firms in the
United States.14 Also, in 2018 (the most recent available data), there were nearly 26.5 million
nonemployer (self-employed) establishments.15
As shown in Table 1, small nonfarm employer firms (fewer than 500 employees) provided
almost half (46.0%) of all nonfarm jobs in 2019.

matter?” Monthly Labor Review, U.S. Bureau of Labor Statistics, November 2016, at https://doi.org/10.21916/
mlr.2016.51 (hereinafter Sadeghi, T alan, and Clayton, 2016).
9 Sadeghi, T alan, and Clayton, 2016.
10 Sadeghi, T alan, and Clayton, 2016.
11 Sadeghi, T alan, and Clayton, 2016.
12 Sadeghi, T alan, and Clayton, 2016.
13 Sadeghi, T alan, and Clayton, 2016.
14 U.S. Census Bureau, “Annual Business Survey: Employment Size of Firm Statistics for Employer Firms by Sector,
Sex, Ethnicity, Race, and Veteran Status for the U.S., States, and Metro Areas, 2019,” at https://data.census.gov/cedsci/
table?tid=ABSCS2019.AB1900CSA04&hidePreview=true.
15 U.S. Census Bureau, “ NES T ables 2018,” at https://data.census.gov/cedsci/table?table=NS1800NONEMP&tid=
NONEMP2018.NS1800NONEMP&d=ANN%20Nonemployer%20Statistics&lastDisplayedRow=33&hidePreview=
true.html.
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Table 1. Number and Employment of Nonfarm Employer Firms, by Employment
Size, 2019
Share of
Nonfarm Employer
All
Firm Employment
# of Nonfarm
Nonfarm
Size
Employer Firms
# of Employees
Employees
Fewer than 20 Employees
5,125,903
20,173,451
15.7%
20-499 Employees
625,131
39,129,407
30.3%
500+ Employees
20,256
69,595,369
54.0%
Total
6,771,290
128,898,227
100.0%
Source: U.S. Census Bureau, “Annual Business Survey: Employment Size of Firm Statistics for Employer Firms
by Sector, Sex, Ethnicity, Race, and Veteran Status for the U.S., States, and Metro Areas, 2019,” at
https://data.census.gov/cedsci/table?tid=ABSCS2019.AB1900CSA04&hidePreview=true.
Job Growth and Opening/Startup Establishments
As shown in Table 2, from 2010 to 2020, opening/startup establishments (establishments with
positive employment in March of the current year following zero employment in March of the
previous year) have accounted for just under 30% of all employment gains (new jobs) in the
United States each year since 2011. By definition, opening/startup establishments do not affect
employment losses, which result from establishments contracting or closing.
Table 2. Net Employment Change, Gross Employment Gains and Losses Overall, and
Gross Employment Gains and Share of Employment Gains From Opening/Startup
Establishments, 2010-2020
Gross
Share of Gross
Net
Gross
Gross
Employment
Employment
Employment
Employment Employment
Gains From
Gains From
Change
Gains
Losses
Opening/Startup
Opening/Startup
Year
Overall
Overall
Overall
Establishments
Establishments
2010
(2,684,236)
10,075,086
(12,759,322)
3,236,266
32.1%
2011
1,908,878
11,629,458
(9,720,580)
3,334,090
28.7%
2012
2,669,299
12,215,725
(9,546,426)
3,554,059
29.1%
2013
2,120,885
12,044,757
(9,923,872)
3,491,509
28.4%
2014
2,274,379
12,282,246
(10,007,867)
3,582,256
29.2%
2015
2,717,966
12,833,679
(10,115,713)
3,691,014
28.8%
2016
2,511,589
13,167,936
(10,656,347)
3,773,906
28.7%
2017
2,032,665
12,953,630
(10,920,965)
3,797,214
29.3%
2018
2,168,233
13,116,333
(10,948,100)
3,757,496
28.6%
2019
1,844,818
13,133,753
(11,288,935)
3,757,569
28.6%
2020
406,001
12,751,017
(12,345,016)
3,775,614
29.6%
Source: U.S. Department of Labor, Bureau of Labor Statistics, “Table 1-A-E: Annual gross job gains and gross
job losses by age and average size of establishment,” at https://www.bls.gov/bdm/age_by_size/
age_naics_size_20201_t1.xlsx.
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Job Growth and Small Establishments
Smal businesses, which include almost al startups, tend to create more jobs than large businesses
during economic expansions and lose more jobs during and immediately following recessions.
For example, in 2010, an SBA study found that from 1993 to 2008, smal businesses (firms with
less than 500 employees) accounted for about 65% of the 17.9 mil ion private-sector net jobs
created during that time period but lost 64% of the 1.5 mil ion net jobs lost in 2008 (during the
Great Recession [2007-2009]).16
In December 2021, the SBA reported that smal firms accounted for about 62% of new private-
sector jobs from 1995 to 2020.17 In November 2021, the SBA reported that in 2020 smal firms
lost 5.9 mil ion net jobs versus 4.1 mil ion for large firms.18
The Role of Small Business and Startups in Net Job Creation
Until recently, the prevailing view among economists was that although smal 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 smal firm sector, and
smal firms provide the greater share of net new jobs.”19
As the availability of data concerning the life cycle of firms and establishments 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. 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. 20
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.21 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.22 Another study, an

16 Brian Headd, “An Analysis of Small Business and Jobs,” SBA, Office of Advocacy, March 1, 2010, pp. 9, 10, at
https://www.sba.gov/sites/default/files/files/an%20analysis%20of%20small%20business%20and%20jobs(1).pdf
(hereafter Headd, 2010). Net job creation refers to the net result of all hiring minus voluntary and involuntary
separations.
17 SBA, Office of Advocacy, “Frequently Asked Questions: December 2021,” at https://cdn.advocacy.sba.gov/wp-
content/uploads/2021/12/06095731/Small-Business-FAQ-Revised-December-2021.pdf.
18 SBA, Office of Advocacy, “Small Business Economic Bulletin: November 2021 ,” at https://cdn.advocacy.sba.gov/
wp-content/uploads/2021/11/09101157/November-2021-Economic-Bulletin.pdf.
19 Headd, 2010, p. 3.
20 Charles Brown, James Hamilton, and James Medoff, Employers Large and Small (Cambridge: Harvard University
Press, 1990), pp. 21, 22 (hereafter Brown, Hamilton, and Medoff, 1990). T he 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.
21 Brown, Hamilton, and Medoff, 1990, pp. 21, 22.
22 Stangler and Litan, 2009, p. 5; and Dane Stangler and Paul Kedrosky, “Neutralism and Entrepreneurship: T he
Structural Dynamics of Startups, Young Firms, and Job Creation,” Kaufman Foundation Research Series: Firm
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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.23
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 smal 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 “chal enge existing firms and increase the competitiveness of
surviving existing firms.”24
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 generaly,
young firms are more volatile and exhibit higher rates of gross job creation and
destruction….
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.25
A 2012 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.26

Formation and Economic Growth, September 2010, p. 5, at http://www.kauffman.org/~/media/kauffman_org/
research%20reports%20and%20covers/2010/09/firmformationneutralism.pdf.
Some studies have found that startup survival rates vary by industry and region and depend, “ at least to some extent, on
when in the business cycle the establishment is born,” with lower survival rates if they were formed during, or just
before the onset of, recessions. See Kevin Cooksey, Karina Beckmanm, and Akbar Sadeghi, “ Assessing the Strength of
Entrepreneurship in America with the BLS Business Employment Dynamics,” U.S. Bureau of Labor Statistics,
presented at the “Meeting of the Group of Experts on Business Regist ers,” organized by the United Nations Economic
Commission for Europe (UNECE), Eurostat and the Organisation for Economic Co-operation and Development
(OECD), September 27, 2017, Paris, France, pp. 9, 10, at https://www.unece.org/fileadmin/DAM/stats/documents/ece/
ces/ge.42/2017/US.pdf.
23 Acs, Parsons, and T racy, 2008, pp. 13, 14.
24 Acs, Parsons, and T racy, 2008, p. 14.
25 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.
26 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/~/
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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
smal , stay smal , and close just a few years after opening.”27
The Role of Surviving Startups in Net Job Creation
Several economic studies have argued that in any given year nearly al net job creation in the
United States since 1980 has occurred in businesses that are less than five years old.28 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 smal businesses that are less than five years old.
However, other studies have found that startups account for nearly al of the positive employment
effect of businesses that are less than five years old in any given year and, as mentioned, the
positive employment effect of startups diminishes over time.
For example, one study found that, in 2005, nearly al 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 al 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.29
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.”30 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.31
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, overal , 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 partial y balance out the jobs lost by failed
and shrinking businesses that started in the same year that they did.32 The study found that
although about half of al 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.”33 The authors argued that their

media/kauffman_org/research%20reports%20and%20covers/2012/11/bds_report_7.pdf.
27 Headd, 2010, p. 7.
28 Stangler and Litan, 2009, p. 4; and Dane Stangler and Paul Kedrosky, “Neutralism and Entrepreneurship: T he
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/~/media/kauffman_org/
research%20reports%20and%20covers/2010/09/firmformationneutralism.pdf.
29 Scott Shane, “Entrepreneurial Job Creation Statistics are Economic Rorschach T est,” Economic Trends, March 15,
2010, at http://smallbiztrends.com/2010/03/entrepreneurial-job-creation-statistics-are-an-economic-rorschach-test.html.
30 Headd, 2010, pp. 8, 9.
31 Headd, 2010, pp. 9, 10.
32 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/~/
media/kauffman_org/research%20reports%20and%20covers/2010/08/firmformationinception8210.pdf (hereafter
Horrell and Litan, 2010).
33 Horrell and Litan, 2010, pp. 4, 8-10.
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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.”34
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.35 The
authors cal ed this a “barbel effect, with job creation occurring at the youngest and oldest ends of
the firm age spectrum, and mostly flat in between.”36
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.37 The authors also found “very little relationship” between the amount of smal
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.”38
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 smal businesses, are
responsible for the substantial majority of net job creation in the U.S. economy.”39 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, overal , higher net job creation rates than
older firms. Specifical y, 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.”40
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.41 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.

34 Horrell and Litan, 2010, p. 10.
35 Stangler and Litan, 2009, pp. 6-7.
36 Stangler and Litan, 2009, p. 5.
37 Stangler and Litan, 2009, p. 10.
38 Stangler and Litan, 2009, p. 8.
39 Ian Hathaway, “Small Business and Job Creation: T he Unconventional Wisdom,” Bloomberg Government, October
31, 2011.
40 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/~/
media/kauffman_org/research%20reports%20and%20covers/2012/11/bds_report_7.pdf.
41 Stangler and Litan, 2009, p. 8; and Horrell and Litan, 2010, p. 5. Also see Scott Shane, “T o Create Jobs, Help
Existing Small Employers,” Bloom berg Businessweek, October 29, 2010, at https://www.bloomberg.com/news/articles/
2010-10-29/to-create-jobs-help-existing-small-employers.
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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.42 Also, as mentioned, if the analysis focuses on business survivors, then the evidence
seems to suggest that the “barbel 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.43
The Role of High-Impact Businesses in Net Job Creation
Because most smal businesses start and remain smal , 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 gazel es), instead of the relative roles of smal versus large businesses, in job
creation.44 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.45
High-impact businesses account for a relatively smal percentage of businesses (typical y 5% to
6% of al businesses with employees), yet account for “almost al [net] job creation in the
economy.”46
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.47 The study
found that high-impact businesses
 accounted for nearly al employment growth in the economy;
 came in al 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 al regions, al states, and al counties;

42 Scott Shane, “Entrepreneurial Job Creation Statistics are Economic Rorschach T est,” Economic Trends, March 15,
2010, at http://smallbiztrends.com/2010/03/entrepreneurial-job-creation-statistics-are-an-economic-rorschach-test.html.
43 Stangler and Litan, 2009, p. 5. 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. T hey found that “ conditional on survival, young firms exhibit
substantially higher growth than more mature firms.”
44 Acs, Parsons, and T racy, 2008. 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.
45 Acs, Parsons, and T racy, 2008, pp. 1, 16, 17.
46 Acs, Parsons, and T racy, 2008, p. 3. T his study also includes a review of the economic literature on high -impact
businesses.
47 Acs, Parsons, and T racy, 2008, p. 1.
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 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 al industries; and
 on average, were smal er and younger than other businesses, but “the average
high-impact business is not a startup and has been in operation for about 25
years.”48
The study’s authors argued that the presence of high-impact businesses in “virtual y al ”
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.49
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 al firms with employees.50 The study found that high-
impact businesses accounted for nearly al net employment growth during the 2004-2008 time
period, came in al sizes (95.3% had fewer than 20 employees, 4.5% had 20-499 employees, and
0.2% had 500 or more employees), existed in al regions and states, were relatively evenly
distributed across al industries, regardless of whether the industries were stagnant, growing, or
declining, and tended to be located in an urban area (85%).51
The study also found that high-impact businesses were, on average, younger than other
businesses across al three business size categories. Specifical y, 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.52
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.53
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 geographical y

48 Acs, Parsons, and T racy, 2008, pp. 1-3, 36, 44.
49 Acs, Parsons, and T racy, 2008, pp. 30-32.
50 Spencer L. T racy Jr., “Accelerating Job Creation in America: T he Promise of High -Impact Companies,” SBA, Office
of Advocacy, July 2011, p. 26, at http://www.sba.gov/sites/default/files/rs381tot.pdf (hereafter T racy Jr., 2011).
51 T racy Jr., 2011, pp. 24-29, 43-46, 54. T he 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.”
52 T racy Jr., 2011, pp. 38, 39.
53 T racy Jr., 2011, pp. 46-50.
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concentrated in just a few states they “are becoming increasingly geographical y dispersed.”54
Hathaway, the study’s author, argued that most nascent entrepreneurs report that they are not
interested in building “a high-growth business.”55 Instead, most nascent entrepreneurs report that
they plan to remain smal and focus on providing an existing service to an existing customer base
rather than creating new services or building a new customer base.56 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.”57 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.”58 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 wil
provide critical insights into the state of economic dynamism and entrepreneurship in the United
States.”59
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 al startups are stil in
business after five years. However, that research also suggests that the influence of smal 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.”60 This finding would suggest that, if providing assistance to startups was used

54 Ian Hathaway, “T ech Starts: High-T echnology 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 (hereafter Hathaway,
2013). T he 14 industries identified as having a high concentration of ST EM 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 syst ems 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.
55 Hathaway, 2013, p. 3.
56 Hathaway, 2013, p. 3.
57 Hathaway, 2013, p. 6.
58 Hathaway, 2013, p. 16.
59 Hathaway, 2013, p. 17.
60 Acs, Parsons, and T racy, 2008, p. 14.
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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 smal group of surviving “high-impact” businesses that are younger and smal er than
the typical business, but also have, on average, been in operation for 25 years. This finding
suggests that al three groups of businesses—startups, younger smal businesses (in operation for
one year to five years), and high-impact businesses—are important contributors to net job
creation.
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 smal business startups, especial y
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 wil emerge as
high-impact businesses.
Implications for Congress and the SBA
The Smal Business Act of 1953 (P.L. 83-163, as amended) authorized the SBA and justified the
agency’s existence on the grounds that smal 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.61
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 Smal Business Act did not mention the SBA’s role in job creation. However, in 1954,
Wendel Barnes, the SBA’s second Administrator, was asked at a congressional hearing to

61 P.L. 83-163, the Small Business Act of 1953, Section 202.
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discuss the SBA’s role in supporting smal businesses. He testified that part of the SBA’s mission
was to provide credit to smal businesses to enable them to “provide additional employment.”62
For many years, economists and others have argued that providing federal assistance to small
businesses is justified because smal businesses are perceived to be at a disadvantage, compared
with other businesses, in accessing capital and credit.63 In their view, lenders are less likely to
lend to smal businesses than to larger businesses because smal businesses tend to be younger
and have less credit history than larger businesses.64 Also, lenders may be reluctant to lend to
smal businesses with innovative products because it might be difficult to collect enough reliable
information to correctly estimate the risk for such products.65 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 migh t 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.66
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.67 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. 68

62 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.
63 For a discussion of the economic reasons for and against providing small businesses tax preferences, see CRS Report
RL32254, Sm all Business Tax Benefits: Current Law, by Gary Guenther.
64 U.S. Government Accountability Office, Small Business Administration: 7(a) Loan Program Needs Additional
Perform ance 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 Sm all Business Adm inistration’s Loan Program s Should Be Abolished , Washington,
DC: American Enterprise Institute for Public Policy Research, AEI Working Paper #126, April 13, 2006, at
http://www.aei.org/wp-content/uploads/2011/10/20060414_wp126.pdf.
65 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/wp-content/uploads/2011/10/20060414_wp126.pdf.
66 U.S. Government Accountability Office, Small Business Administration: 7(a) Loan Program Needs Additional
Perform ance Measures, GAO-08-226T , November 1, 2007, pp. 3, 9 -11, at http://www.gao.gov/new.items/d08226t.pdf.
67 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 decisionmaking, 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 T hey 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:
T he Contribution of Ethnic Enterprises to the Economic and Social Well-Being of America,” in Are Sm all Firm s
Im portant? Their Role and Im pact (Boston: Kluwer Academic Publishers, 1999), pp. 129 -145.
68 Robert W. Fairlie and Alicia M. Robb, “Disparities in Capital Access between Minority and Non-Minority-Owned
Businesses: T he T roubling Reality of Capital Limitations Faced by MBEs,” U.S. Department of Commerce, Minority
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In recent years, advocates of providing federal assistance to small businesses have focused
increased attention on the SBA’s role in job creation.69 For example, the SBA has argued that
“improving access to credit by smal businesses is a crucial step in supporting economic recovery
and job creation.”70
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.71
The following sections examine the potential consequences of using net job creation as a SBA
program performance measure and for targeting SBA assistance. That assistance, other than for
COVID-19-related lending—which has expanded eligibility criteria—is 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 nonfederal sources without the SBA’s assistance.72 About 97% of all business concerns
currently meet the SBA’s eligibility criteria.73
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 smal businesses because those measures focus
primarily on output, such as the number of loans approved and funded, rather than outcomes,
such as how wel the smal businesses do after receiving SBA assistance.74 GAO has
recommended that the SBA devise program performance measures based on outcomes to enable

Business Development Agency, January 2010, pp. 3-5, 8, 17-23, at http://www.mbda.gov/sites/default/files/
DisparitiesinCapitalAccessReport.pdf.
69 For example, see T he White House, “Remarks by the President on Job Creation and Economic Growth,” December
8, 2009, at https://obamawhitehouse.archives.gov/photos-and-video/video/job-creation-and-economic-
growth#transcript .
70 SBA, “President Obama Announces New Efforts to Improve Access to Credit for Small Businesses,” 2009, at
http://www.sba.gov/idc/groups/public/doc uments/sba_homepage/sba_rcvry_new_effort_credit_sb.pdf.
71 SBA, “FY2009/2010 Final – Recovery Program Performance Report, September 2010,” September, 2010, at
https://www.sba.gov/sites/default/files/recovery_act_reports/perform_report_9_2010.pdf.
72 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 nonprofit
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 chil d care centers,
see 13 C.F.R. §120.707.
73 SBA, “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.wcoeusa.org/sites/default/files/Size%20 Standards%20Methodology%20from%20SBA.pdf .
74 U.S. Government Accountability Office, Small Business Administration: 7(a) Loan Program Needs Additional
Perform ance 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 wel the agency is meeting its strategic goal of helping smal
businesses succeed.”75
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.76
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 al applicants.”77
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 $75,000 of project debenture.78 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
$120,000 of project debenture.79
The SBA also requires its management and technical assistance training program counselors to
report information concerning job creation and retention.80 In addition, as mentioned, the SBA
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
2009.81 The SBA’s Office of Advocacy also periodically commissions independent studies of job
creation and net job creation by smal businesses to draw attention to “the contributions and
chal enges of smal businesses in the U.S. economy.”82
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

75 U.S. Government Accountability Office, Small Business Administration: 7(a) Loan Program Needs Ad ditional
Perform ance Measures, p. 2.
76 T racy Jr., 2011, p. 55.
77 T racy Jr., 2011, p. 55.
78 For further analysis of the 504/CDC program, see CRS Report R41184, Small Business Administration 504/CDC
Loan Guaranty Program , by Robert Jay Dilger.
79 SBA, “SOP 50 10 5(K): Lender and Development Company Loan Programs,” effective April 1, 2019, p. 309, at
https://www.sba.gov/document/sop-50-10-5-lender-development-company-loan-programs. T he 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.” T he 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 $75,000 in project debenture, or for every $ 85,000 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 . See SBA,
“Development Company Loan Program - Job Creation and Retention Requirements; Additional Areas for Higher
Portfolio Average,” 83 Federal Register 55225-55226, November 2, 2018.
80 For further analysis of SBA management and technical assistance programs, see CRS Report R41352, Small
Business Managem ent and Technical Assistance Training Program s, by Robert Jay Dilger.
81 SBA, “FY2009/2010 Final - Recovery Program Performance Report, September 2010,” September 20 10, pp. 2, 3, at
https://www.sba.gov/sites/default/files/recovery_act_reports/perform_report_9_2010.pdf.
82 SBA, Office of Advocacy, “About US,” at https://www.sba.gov/category/advocacy-navigation-structure/about-us-0.
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the jobs created by the SBA’s programs, such as whether the jobs (and recipient smal businesses)
last or disappear relatively soon.83 Congress could use this information to compare programs and
as a factor in its deliberations concerning SBA funding and priorities.
The counterargument is that implementing net job creation as a 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 smal 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 a 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 a 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 targeting SBA’s non-COVID-19-related lending assistance might enhance
congressional efforts to promote job growth. Job growth has been one of the top domestic
priorities of recent Congresses.
The counterargument 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 lending 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 lending assistance
for the same reason they might oppose using net job creation as a 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.
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 a SBA

83 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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Small Business Administration and Job Creation

guaranteed loan to protect their 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 nonfederal 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.84 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 nonfederal sources without the SBA’s assistance. The counterargument is that the SBIC
program is much smal er than the SBA’s business loan guaranty programs (e.g., the SBA
guarantees between $3 billion and $4 billion in SBIC debentures annually compared with nearly
$30 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 lending
assistance wil 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 al startups are stil in
business after five years. However, economic research also suggests that the influence of smal
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.”85 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.
The economic research on net job creation also suggests that net job creation is concentrated
among a relatively smal group of surviving “high-impact” businesses that are younger and
smal er than the typical business, but also have, on average, been in operation for 25 years. This
finding suggests that al three groups of businesses—startups, young smal businesses (in
operation for one year to five years), and surviving high-impact businesses—are important
contributors to net job creation.

84 For further analysis of the Small Business Investment Company Program, see CRS Report R41456, SBA Small
Business Investm ent Com pany Program , by Robert Jay Dilger.
85 Acs, Parsons, and T racy, 2008, p. 14.
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As mentioned, 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 smal business startups, especial y 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 wil 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 specifical y 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 al ocation of its
assistance.

Author Information

Robert Jay Dilger

Senior Specialist in American National Government

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should n ot be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material.

Congressional Research Service
R41523 · VERSION 27 · UPDATED
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