Small Firms, Employment, and Federal Policy

Abstract

[Excerpt] It is widely believed that small firms promote job growth. In fact, small firms both create and eliminate far more jobs than large firms do. On balance, they account for a disproportionate share of net job growth—however, that greater net growth is driven primarily by the creation of new small firms, frequently referred to as start-ups, rather than by the expansion of mature small firms. The greater net job-creation rates associated with new small firms could motivate lawmakers to consider supporting such firms through various policy initiatives. However, policies specifically favoring small firms have both advantages and disadvantages. For instance, policies designed to prevent discrimination or reduce pollution would probably have smaller adverse effects on employment if they exempted small firms in those cases where compliance was particularly costly for small firms. Conversely, some policies CBO has examined that would increase employment, such as reducing payroll taxes for firms that hire additional workers, would be less cost-effective if they were restricted to small firms. Under current federal laws and regulations, small firms already receive more favorable treatment than large firms do in many areas. For example, certain provisions of the tax code relating to capital gains and the expensing of capital investments favor small firms. The Small Business Administration (SBA) helps small firms obtain loans. And many regulatory policies, such as those prescribed by the Family and Medical Leave Act of 1993, include exemptions for small firms. Because further efforts to favor small firms may shift employment away from large firms in an inefficient manner, broadly targeted policies may spur total employment more effectively.