Time to shutter that mom and pop shop

USA, the land of opportunity, has been the poster child of the entrepreneurial spirit. A place where innovation is God and small businesses lead economic growth, spawning numerous millionaires in its wake. According to SBA (Small Business Administration) nearly 99% of all businesses in US are small businesses providing for nearly half the jobs in the whole country. This long tail powers half of the country’s economy and is deeply embedded into the American life.

However a lot of data published in USA considers a business with up to 500 employees as a small business. This typically ends up including a large number of small chains and other mid sized corporations. But one always wonders what about those mom and pop stores or that independent worker? Is our economy also helping these small establishments ride the economic wave? Can more people work either independently or sustain themselves with a smaller businesses? More and more people have anecdotal evidence on how it has become harder to start and retain a small business. I wanted to see if that was actually affecting the growth of these small businesses.

To dig a little deeper I ended up picking out some data available from US census website. I looked at all the data available for businesses with less than 20 employees. I wanted to compare that to the behemoths of the American economy, the businesses with 500+ employees.

Businesses per capita

As it turns out the last 15 years haven’t been great for the small business. USA has seen fewer businesses started since the late 70’s. Multiple studies have looked at the firm entry and exit data and have drawn similar conclusions. While this decline is not a new phenomenon and we have seen our economic cycles add businesses at a slower rate, the number of small businesses has been shrinking much faster. The blue line above shows the number of small businesses per capita (businesses per 1000 people) and the green one is number of large businesses per million. While both are still slaves to the economy, the trend is much more pronounced in small businesses.

This trend has been particularly alarming when coupled with the fact that income mobility has been on the decline and wealth inequality is at its highest. At the heart of this lies the fact that its much harder to start and fail. Entrepreneurship relies on the ability to fail and bounce back. With absolute income (adjusted for inflation) stagnating, and wealth inequality growing, the population is growing risk averse. The unequal distribution of wealth has also led to partitioned economic zones and disparate growth.

A similar trend is visible when we compare the percentage of population these businesses employ.

Employement based on Size

Blue line represents the declining share of the population that earns its livelihood from these small businesses. This has taken a drastic hit over the past 15 years and does not seem to be stopping any time soon. More and more jobs are being consolidated into fewer businesses as the rate of growth of small businesses slows down.

Part of this is also fueled by the shrinking payroll of these small businesses. They are struggling to keep up with the wage increases in large corporations making them less lucrative.

Ratio of Average Payroll

Payroll numbers are much harder to decipher as the data is fragmented. In general rising startup costs coupled with low minimum wages has also kept average payroll down. The increase in minimum wage debate also has been a point of consternation between small businesses, as a large number of them are already struggling to keep their doors open.

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