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Grow the Economy through Small Businesses

Wednesday, April 3, 2013

The majority of private sector job growth is from small businesses, and reforming licensing requirements is a promising route to increased business formation.

More than half of net private sector job growth comes from small businesses, particularly from a subset of young, dynamic firms, yet detailed data about the attributes and needs of small businesses are too often unreliable or nonexistent. Thus policymakers are largely flying blind when creating legislation that affects these firms. Research by the Ewing Marion Kauffman Foundation shows that without new businesses, there would have been no net job growth in the United States over the past three decades, both on average and in nearly any given year as well. Understanding the preferences of these firms should be a priority for researchers and policymakers.

There are very few reliable data sources about the nature and preferences of small businesses in the United States. The Census Bureau provides the most widely cited data about the composition of U.S. small businesses, but that only includes basic descriptions of firms, such as industry, number of employees, and payrolls. We have even less data available about the current condition or policy needs of small businesses. The reason behind this information void is simple: the community is disparate. More than 91 percent of U.S. businesses have four employees or fewer, making it difficult and expensive to reach the vast majority of them.

A new source of data about these businesses has recently emerged to help remedy this dearth of information: the Thumbtack.com Small Business Friendliness Survey. New technologies developed in recent years have made it possible to gather data that had previously been nearly impossible to attain. Whereas in past years surveying a broad and diverse swath of small businesses nationally would have been prohibitively expensive, today small businesses are aggregating themselves online. One of the places they can be found is on the small business marketing site called Thumbtack.com. In partnership with the Kauffman Foundation, Thumbtack uses its access to 275,000 of these firms to gather information about them in surveys, analyze the data, and publish the results.

The second annual Thumbtack-Kauffman survey asked 7,766 small firms nationwide what it is like to do business where they live and how their local governments could better assist them. The surveyed firms draw from a variety of professions and geographies, such as Los Angeles photographers, Phoenix general contractors, and Philadelphia web designers. Using the Census Bureau’s North American Industry Classification System and County Business Patterns data, we found that approximately 35 percent of all establishments in the United States are in sectors covered in our survey.

Professional licensing regulations and effective training and networking programs receive relatively little discussion by state legislators relative to their importance to small businesses.

First, the survey’s findings make clear that professional licensing and permitting requirements play an extraordinarily important role in the ability of new firms to enter markets and to grow their businesses. Small businesses rate professional licensing requirements as substantially more important than taxes in determining a state’s overall business-friendliness. These results confirm our findings last year, which also showed that licensing and permitting requirements take on outsized importance in the life of a small business compared to the amount of discussion they receive in state legislatures or the public dialogue. Of the businesses surveyed this year, 40 percent reported being subject to licensing requirements at more than one level, such as by states and cities, and many of these had to comply with licensing regulations in multiple jurisdictions within each level, such as multiple counties within the same state.

Although licensing regulations can benefit both businesses and consumers, they can impose significant barriers to firm creation and growth. The regulations require money and time. Almost all businesses subject to these requirements must pay both initial and ongoing compliance fees to hold a professional license. These fees can reach into thousands of dollars annually. Similarly, obtaining and renewing a license frequently entails a substantial expenditure of time, often more burdensome to small businesses than the monetary outlay. Obtaining a barber’s license in New York, for example, costs $60 in fees, but requires 884 hours of training and apprenticeship. The survey results reveal that, where appropriate, reducing the time and money spent obtaining and renewing professional licenses is a promising route to increased business formation and growth. Similarly, there is much opportunity for state legislators to consolidate overlapping licensing regimes within states or even across states. These results echo the findings of other recent research that shows occupational licensing restrictions are an important but often overlooked barrier to entrepreneurship.

Second, in addition to simplifying professional licensing regulations, the results of the Thumbtack-Kauffman survey highlight how states and cities can make a significant positive impact on the growth of small business: offering effective training and networking programs. One of the major obstacles to entrepreneurship is a matter of perception — some individuals who could start successful businesses never try because they believe the process is too complicated, or because they have inaccurate or inadequate information on what an entrepreneur actually needs to be and do. Government can play an affirmative role in educating potential job-creators and reducing their anxiety.

In the past, surveying a broad and diverse swath of small businesses nationally would have been prohibitively expensive, but today small businesses are aggregating themselves online.

In two years of conducting our small business surveys, we have found that the availability of helpful training and networking programs is a powerful predictor of how business owners viewed the friendliness of their states toward business. Fortunately, “helpful” need not mean “expensive.” In evaluating feedback from thousands of small businesses to an open-response question in the survey, we noticed that some of the most useful resources mentioned were relatively simple programs targeted at very new businesses. The most-cited such training programs were in professional licensing, tax compliance, and organizational documents and are offered by local chambers of commerce, SCORE offices, or small business agencies.

A final point about this year’s survey results pertains to taxes. We might expect that taxes are overwhelmingly important to small businesses when they rate the business friendliness of their state or city. In reality, that suspicion is largely unfounded. As noted earlier, licensing regulations tended to matter more than taxes to business owners. Additionally, this year our survey asked small businesses whether they felt their tax levels were fair. In aggregate, more than half reported paying about the right share of taxes. We also looked at the responses grouped by political preference and business size. Political conservatives represented the largest share of those who felt they paid an unfairly high level of taxes (45 percent), followed by independents (35 percent) and liberals/progressives (25 percent). The size of the respondent’s business also played a significant role in whether he or she felt the tax level was fair. The bigger the business, the more unfair the business owner tended to view his or her tax rate. Overall, however, it is clear from the survey results that small businesses care about many non-tax issues at least as much as — if not more than — tax rates themselves.

Much of what makes an individual decide to become an entrepreneur — and whether he or she will ultimately succeed — is admittedly outside of policymakers’ control. The same is true for many of the attributes that make a geographic location attractive to a would-be founder. Nevertheless, we should take advantage of the data unleashed by new technologies to inform ourselves about the preferences of business owners. These new data show that certain issues, like taxes, garner outsized discussion by legislators relative to their actual importance to most businesses. Similarly, other issues, like professional licensing regulations and effective training and networking programs, receive relatively little discussion by state legislators relative to their importance to small businesses. We hope that technological advances will soon enable more organizations to gather additional knowledge on businesses nationwide. What other important trends might we be missing due to incomplete or inadequate data about our economy?

Nathan Allen is senior analyst and Sander Daniels is co-founder of Thumbtack.com.

FURTHER READING: Coverage of last year’s survey can be found in “Friending Business.” Mackenzie Eaglen writes “Defense Sequestration Targets Small Business,” Mark J. Perry notes “The Minimum Wage is Unfair to Small Business Owners,” and Scott Shane asks “Why Aren’t Banks Lending to Small Business?

 

Image by Dianna Ingram / Bergman Group

 

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