Small Business and Jobs

A key justification for small-business tax breaks is that small enterprises are supposedly engines of job creation. The Canadian Federation of Independent Business’ (CFIB) oft-repeated claim that “small- and medium-size businesses employ more than half the workforce” (PDF) cites Statistics Canada’s Survey of Employment, Payrolls and Hours.

A closer examination of that Survey casts doubt on this statement, the quantity and quality of jobs created by small enterprises, and the effectiveness of tax preferences for such enterprises.

Employment

CFIB’s claim is based on defining “small- and medium-size businesses” as all employers with fewer than 500 employees. This definition encompasses many rather large enterprises.

Simply lowering the threshold to 300 employees would contradict CFIB’s claim. Enterprises below that size employ less than half of Canada’s workforce.

Genuinely small employers with fewer than 50 employees account for less than one-third of the workforce. Of course, all of these definitions overstate the importance of small businesses by including public-sector and non-profit employers.

Employment Shares by Enterprise Size, First Quarter of 2009

 

Canada 

Quebec 

Under 500

 53.2 %

 56.0 % 

Under 300 

 48.9 %

 51.8 % 

Under 50 

 30.7 % 

 32.9 % 

Note: Since Statistics Canada just released data for June, the Second Quarter of 2009 should be available soon.

Job Creation

Another common claim is that small business provides some incredibly large percentage of new job creation. This claim seems consistent with headlines about mass layoffs by large employers.

The Survey of Employment, Payrolls and Hours indicates that employment by small enterprises peaked in the third quarter of 2008. Employers with fewer than 300 employees accounted for all of the net job creation in 2008 up to that point.

However, they have been responsible for all of the net decrease in employment since then. If small business gets credit for creating jobs during boom times, should it be blamed for eliminating jobs during the bust?

Canadian Employment by Enterprise Size

 

Under 300

Over 300 

2008Q1

 7,058 

 7,208 

2008Q3 

 7,520 

 7,166 

2009Q1 

 6,926 

 7,231 

Note: Since Statistics Canada just released data for June, the Second Quarter of 2009 should be available soon.

Job Quality

What about the quality of employment offered by small business? Enterprises with more than 300 employees provide average weekly earnings of $900.

Smaller enterprises tend to pay slightly fewer hours per week, at lower wage rates. Specifically, enterprises with fewer than 100 employees provide average weekly earnings of $750 or less.

Tax rates and subsidies that favour small businesses may induce large businesses to contract out more functions to them. Such contracting-out is usually bad for the employees concerned.

Enterprises with more than 100 employees have slowly but steadily increased average weekly earnings during the recession. Those with fewer than 100 employees cut average weekly earnings between the fourth quarter of 2008 and the first quarter of 2009.

Tax Breaks

Whatever the number of people currently employed or jobs created by small business, it is not clear that preferential tax treatment will improve these outcomes.

As CFIB itself acknowledges (PDF), “Wherever there are customers there will be entrepreneurs. Regardless of the tax burden, people will always need to buy groceries, restaurant meals, hotel rooms, haircuts, cars, furniture, investment advice and so on.” Such businesses are tied to their local customer base and cannot relocate in pursuit of lower tax rates.

However, CFIB argues that local tax policies can affect how many of these businesses succeed or fail in the local market. Quebec levies by far the highest provincial tax rate on “small business” profits and offers by far the least generous tax credit for “small business” dividends. Quebec also finished dead last in the CFIB’s overall ranking of provincial income, sales, payroll and property taxes.

If such factors had a negative effect on employment by small business, one might expect Quebec to suffer from a deficiency of such employment. In fact, small-enterprise employment is proportionally greater in Quebec than in the rest of Canada (see the first table above).

10 comments

  • Great job, Erin. It’s so important to have people like you to go and check the facts behind assertions that are thrown around in the public debate as if they were common knowledge. So many arguments are wedged and won based on such “myths” that would easily be dismissed if only people had the time to go back to the facts and check what’s true and what isn’t.

  • Thank you for this important post. Erin mentions the matter of large companies contracting out to small companies to benefit from various advantages. I wonder if overall figures exist for the amount of “small business” activity/employment that isn’t small business at all. Where could one go to find such information? Thank you.

  • Hi Nathan,

    The business register at Statcan is the place for any stats on business counts and employment estimates.

    However the stats you are looking does not exist. I worked in the register for over a years and a half. It is actually what I would call a boundary of the firm problem. In fact one could argue, which I did in a paper a couple years back that the contracting out by larger companies is actually effecting the NAICS counts.

    For example, 20 or so years ago, manufacturing was measured by specific SIC codes (now NAICS). The boundary of the firm was quite simplistic in terms of measurement as one had all the establishment linkages for a particular enterprise. (an establishment is what one of the levels of business entities defined by the BR)

    The methodology used for assigning a NAICS code to a Enterprise is the dominant Establishment employment count based on payroll data. So therefore enterprise based manufacturing NAICS counts of business entities could be a plethora of establishment based NAICS. So as one starts hiving off establishments or lower orders of value adding activities of a enterprise, one starts witnessing a movement in the underlying conception of what makes up the manufacturing counts.

    This is especially true when we know from various studies a lot of the value adding that was hived off of manufacturing enterprises were auxiliary functions such as offline services to manufacturing like, security, cleaning, engineering services etc.

    So what we get are more homogeneity in the manufacturing establishments that make up the enterprises classed into the manufacturing NAICS, and a corresponding increase in service industry NAICS.

    This is precisely the question NAthan is asking and it is a quite good one, as it gos to the core of one myth in the economy right now. THat manufacturing is a twilight industry in developed economies. It is precisely these slippery numbers that can produce a lot of fiction.

    To what extent this has occurred is hard to say. Statcan has embarked on an employment estimate in the service industries based upon the NAICS on the product they are attached to, (if there is a product) I am not sure if the study and the resulting data series was a one off.

    This is all publicly available somewhere, so no I didn’t spill any corporate secrets, (before they try and fire me again- I was threatened once for blogging on here and I am a bit gun shy now.)

    Sorry for the grammar but this window has no grammar checker and I am in a hurry.

  • I would also have some reservations with the data on small business counts. There is a lot of movement in and out, i.e. births and deaths into the population, and I don’t care how good any Register is, trying to keep tabs on that kind of movement is rather arcane, even i the modern day of information.

  • In terms of job creation, are you claiming that of the close to 400 000 job losses since October, 2008, have been due to small businesses? And not, for example, the auto sector and several other key large industries and those tied to their declines?

  • As outlined above, Statistics Canada figures indicate that all of the net job losses since the third quarter of 2008 have been from workplaces with fewer than 300 employees. (In terms of sheer numbers of jobs, layoffs at large manufacturers have been offset by hiring at other large employers.)

    I think that reduced small-business employment is driven by larger economic forces, including the ones you mention. The level of small-business activity and employment essentially depends on demand from big businesses, public institutions and consumers who work for these larger employers. Therefore, I do not think that giving unconditional tax breaks to small businesses will create jobs.

  • Erin would it not then be logical to target tax breaks to the corporate sector if as you say they pull smaller businesses?

  • All of the current and proposed tax breaks for small business go to “the corporate sector.” Unincorporated businesses are subject to personal taxes rather than corporate taxes.

    However, I understand your question to be about focusing corporate tax cuts on large as opposed to small corporations. If one believed that corporate tax cuts prompted greater investment, then tax cuts for large corporations would indeed produce spinoff benefits for small businesses.

    For reasons presented in many previous blog posts, I do not believe that corporate tax cuts prompt investment. Therefore, I advocate greater public investment, which certainly would have spinoff benefits for small businesses.

  • I was just making sure all the Is and Ts were dotted and crossed:),

  • There are some policy circles that believe small businesses are the harbingers of innovation and other such notions.

    Actually in my thinking when it comes to innovation, who in terms of size of business entity leads such an array of practices- i.e. tech development, training, r&d, tech diffusion and the many other factors that make up innovation.

    I know the CFIB are huge believers in this notion and that is something Erin that you will run into with the small business tax issue.

    Personally, it is unfolding revelation. Small business have no R&D budget so in terms of R&D they have very little to speak of. Small business do not train on any level comparable to larger entities in terms of formal training, they do offer on the job training however. They do have the advantage of flexibility, in terms of ideas and change, as they do not suffer from the bureaucracy. Their is also potentially a entrepreneurial effect that is not covered off by the last point that small business have an advantage. However, without the R&D, it is hard to develop any overwhelming, creative destruction type notion to small business, that many of the small business supporters hang on to.

    So in the end it what benefits arise from the small business sector that would warrant tax incentives and breaks to base some growth strategy on.

    pt

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