SMALL BUSINESS EMPLOYMENT John Revesz Ralph Lattimore STAFF RESEARCH PAPER INDUSTRY COMMISSION August 1997 The views expressed in this paper are those of the staff involved and do not necessarily reflect those of the Industry Commission. Appropriate citation is indicated overleaf. Commonwealth of Australia 1997 ISBN This work is copyright. Apart from any use as permitted under the Copyright Act 1968, this work may be reproduced in whole or in part for study or training purposes, subject to the inclusion of an acknowledgment of the source. Reproduction for commercial usage or sale requires prior written permission from the Australian Government Publishing Service. Requests and inquiries concerning reproduction and rights should be addressed to the Manager, Commonwealth Information Services, Australian Government Publishing Service, GPO Box 84, Canberra ACT 2601. Inquiries: Publications Officer Industry Commission Locked Bag 2 Collins Street East Post Office Melbourne Vic 8003 Tel: (03) 9653 2244 An appropriate citation for this paper is: Revesz, J., Lattimore, R., (1997) , Small Business Employment, Industry Commission Staff Research Paper, Industry Commission, Canberra, August. Forming the Productivity Commission The Industry Commission, the former Bureau of Industry Economics and the Economic Planning Advisory Commission have amalgamated on an administrative basis to prepare for the formation of the Productivity Commission. Legislation formally establishing the new Commission is before Parliament. ACKNOWLEDGMENTS We would like to thank a number of officers from the Australian Bureau of Statistics who provided valuable advice and other assistance. Special thanks are due to Michael Jones, Bill Pattinson and Clem Tozer. The report was written by John Revesz and Ralph Lattimore. Terry Maidment provided valuable computing and research assistance, Johanna Travis provided research assistance on recruitment issues and Claudia Leslie gave substantial editing help. Helpful referee comments were provided by Deborah Peterson, Garth Pitkethly, Susan Richardson and Lynne Williams. We would also like to thank Andrew Barger of DIST, who provided useful comments on an early draft. Overall supervision of the project was carried out by Barry McCann and Ralph Lattimore. This research was part sponsored by the small business area of the Department of Industry, Science and Tourism (DIST). iii CONTENTS ACKNOWLEDGMENTS iii ABBREVIATIONS vii OVERVIEW ix 1 INTRODUCTION 1 1.1 Scope and purpose 1 1.2 Data and definitions 2 1.3 Outline 3 2 THE SMALL BUSINESS EMPLOYMENT SHARE 5 2.1 Wage and salary earners 5 2.2 Part-time employees 8 2.3 The average size of enterprises 10 2.4 International comparisons 11 2.5 Small business operators 14 2.6 Composition of the total labour force 16 2.7 Caveats about the data 19 3 EMPLOYMENT DYNAMICS 23 3.1 Contribution to employment growth 23 3.2 Job generation studies 28 3.3 Job turnover 30 3.4 Survey of recruitment 34 4 SECTORAL ANALYSIS 37 4.1 Basic data 37 4.2 Small business in manufacturing 42 4.3 Wholesale and retail trade 44 4.4 The ratio between sales and employment 45 5 JOB CHARACTERISTICS IN SMALL BUSINESS 49 5.1 Relative wages 49 5.2 Earnings of small business operators 52 5.3 Labour stability and turnover 54 5.4 Casual employment 57 5.5 Other indicators 58 5.6 Some observations about job quality 61 v 6 EXPLAINING THE RISE OF SMALL BUSINESS 69 6.1 Popular misconceptions 69 6.2 Toward a theory of the composition of the economy by firm size 70 6.3 Recent developments 72 6.4 The role of small business in the labour market 75 6.5 Empirical evidence on the role of small firms in the labour market 83 6.6 Why did small business employment shares change? 90 6.7 Policy implications 93 APPENDICES A Employment by firm size 103 B Small business operators 121 C The Weeda survey 131 D Job growth and turnover 141 E Sectoral statistics 149 F Job quality indicators 161 G Public outsourcing 173 H The recruitment survey 175 I Size determinants 181 J Modeling entrepreneurs 187 K Innovation by firm size 191 L The JOBSTART program 193 REFERENCES 195 vi OVERVIEW This report examines the changing size distribution of firms in Australia and, in particular, some implications of the growing importance of smaller firms in the economy. The big picture Between 1983–84 and 1994–95, small business (defined to cover all enterprises, but not subsidiaries or outlets, with less than 100 employees) has significantly increased its share of national employment (table 1). The increase was mainly at the expense of public and agricultural employment. On the other hand, there was little expansion in the share of the over 100 person private firm category. Table 1: Share of national employment, 1983–84 to 1994–95 Private non-farm sector Farm Public by firm employment size sector sector < 20 20 - 99 <100 100+ Total 1983–84 (%) 29.0 12.5 41.6 25.4 67.0 6.5 26.5 1994–95 (%) 32.8 13.8 46.6 26.6 73.2 5.4 21.4 1983–84 to 1994–95 (change in 3.8 1.2 5.0 1.2 6.2 -1.1 -5.1 percentage points) Source: Table E.6 in appendix E. Comparisons with other OECD countries indicate that the share of small business employment in Australia is higher than in large industrialised economies like the USA, UK, Germany and France. However, it is in line with the share of small business in a number of developed small economies, such as Denmark and Spain. Although the shift toward small business in terms of the share of employment has been gradual, in recent years small business appears to have accounted for a disproportionate share of new net jobs in the economy. Between 1983–84 and 1994–95, firms with less than 20 employees accounted for 53 per cent of net new jobs added to the Australian economy, and firms with less than 100 employees accounted for 72.6 per cent of such jobs. These contributions are much higher than the employment shares of such small businesses — which were around 33 per cent and 47 per cent respectively, of national employment in 1994–95. We find that there are quite marked variations in the apparent job creation by small business, depending on the preferences of the statistical user for one ix SMALL BUSINESS EMPLOYMENT definition over another. In all cases, however, the rate of employment growth in small business has exceeded the average rate of employment growth. Consistent measurement in this area is, however, very difficult. The actual contribution to job creation by small business is confused by ‘category shifting’ — this occurs when larger firms re-organise or downsize so that they are categorised as small businesses. On the other hand, anomalies in the employment data (which are currently being revised by the ABS) suggest that small business may well have accounted for an even higher percentage of new jobs in the economy. Reasons for the employment shift Analysis of sectoral changes provides one perspective on the proximate causes for the shift (table 2). At the economy wide level, some of the growth in the business share of national employment (including small business) is a statistical inevitability — contraction in the public sector means that the residual private sector employment share must grow. But the story is far from being wholly a statistical artefact because: • there was compensating job creation in the business sector (including small business); and • the share of small business in total private non-farm sector employment grew as well. The increase in the private non-farm employment share of small business largely reflects structural changes in the private sector. It reflects growth, in relative terms, of sectors in which small firms play a dominant role. Surprisingly though, the higher (smaller) the small business intensity in a sector in 1983–84, the more likely it is that its intensity fell (grew) over the next decade. For example, manufacturing, which has a relatively low small business intensity, has declined in importance compared to other sectors — but its small business share has expanded. In the area of accommodation, cafes and restaurants, the opposite trend is evident. Small business plays a relatively important role in this expanding sector — yet that role has diminished over the last decade. This pattern is not consonant with a generalised shift in the comparative advantage of smaller enterprises. While at one level structural change provides an explanation for the marked changes in the non-farm size distribution of private firms, it does not explain the origin of these structural shifts in the first place. We note too that another possible candidate for the shift — the rapid growth of part-time employment in the economy — did not raise the share of small x OVERVIEW business in national employment because in recent years part-time employment has grown more strongly in large firms. Table 2: Sectoral changes that account for the increase in the share of small business employment between 1983–84 and 1994–95a Firm employment size Source of change Under 20 Under 100 %% Contraction in the share of public employment 2.2 3.2 Contraction in the share of farm employment 0.5 0.7 Increases in the sectoral share of property and business services 1.0 1.4 Increases in the sectoral share of health and community services 0.7 1.2 Other changes in the sectoral composition of private demand -0.4 -1.0 Reduction in average firm size in manufacturing 1.0 1.4 Increasing importance of supermarkets and chain stores -1.1 -1.0 Changes in the share of SB in other sectors 0.1 -0.3 Otherb -0.3 -0.6 Total change in the employment share of small business 3.8 5.0 a We describe the methodology used in appendix E.