Reinvigorating Small Businesses: Identifying Obstacles and Finding Solutions to Drive Growth and Job Creation

FEB 2018 Source: Global Markets Institute
TOPIC: Global Markets Institute

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This publication is a compendium of reports previously issued by the Global Markets Institute, including “Who pays for bank regulation?” (June 2014), “The two-speed economy” (April 2015) and “Narrowing the jobs gap: overcoming impediments to investing in people” (July 2016). This report was published in conjunction with the Goldman Sachs 10,000 Small Businesses Summit: The Big Power of Small Businesses.

The quality of the current U.S. economic recovery – now among the longest on record – has varied widely for small firms relative to large ones. Despite what the national economic data would suggest, new firm formation has been softer than in the past and small businesses have suffered tepid employment, revenue and wage growth relative to large firms.

The most widely-cited and most likely explanation for this bifurcation, which we discuss at length in “The two-speed economy,” is that the cumulative impact of post-crisis regulations and related policy actions contributed to this outcome. For example, new banking regulations have made bank credit both more expensive and less available, which has affected consumers and small firms disproportionately since they largely lack alternative sources of financing. At the same time, large firms have been able to tap into the public capital markets at low rates (see “Who pays for bank regulation?”).

The soft small business environment should be a cause for concern for policymakers and regulators alike. Small businesses support workforce dynamism, employing a more diverse group of individuals than do large firms; for example, small firms have a larger share of employees who are younger (less than 25 years old), have a formal education below the high-school level, and are older (65 years or older). Small firms also serve as a critical “safety net” for individuals shifting between jobs, or even careers.

These dynamics are exacerbated by ongoing technological disruption of the labor market. On the one hand, the activities that are offloaded to machines tend to be data-intensive, repetitive and standardized – work for which technology and machines are more efficient than people, especially when done at scale. On the other hand, people maintain a competitive advantage over machines in almost all contexts in which repetition and measurement are not central or even possible. Jobs that require people also frequently involve interpersonal interaction or have a social aspect, which tends to mean they can be done only on a small scale.

Small businesses, which often define their competitive advantage as their ability to offer personalized service and bespoke output, are important sources of employment amid the changing jobs landscape. They may be able to better leverage the specialized skills that larger firms no longer need, create new types of jobs that offer a safety net and also serve as a key source of training (see “Narrowing the jobs gap: overcoming impediments to investing in people”). However, given lower rates of new firm formation relative to the historical trend – there are roughly 675,000 “missing” small firms – the safety net small firms can provide is no longer guaranteed.

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