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Why Small Businesses Matter for Workers

Date: 18 Apr 2018 | posted in: Retail | 0 Facebooktwitterredditmail

Both small businesses and working people win when public policy works to disperse economic power.

A few weeks back, in a piece for Jacobin, an influential magazine on the left, Matt Bruenig argued that promoting small business is “mostly a bad idea,” because small businesses are bad for workers. They pay lower wages, he wrote, and offer fewer benefits.

He’s wrong, both in his specific argument about wages, and also about the deeper question of whether policies that decentralize economic power are good or bad for working people.

On the issue of wages, Bruenig presents a series of graphs to support his conclusions. The main one shows that firms with more than 1,000 employees pay about twice as much as those with a staff of under 10 people. That’s a big gap, and it makes Bruenig’s case against small businesses seem pretty compelling.

But there are two problems here. One is that the graph uses the wrong data. And second, there’s a hugely consequential piece of information missing from Bruenig’s analysis.

First, on the data: the wage figures Bruenig presents are for establishments, not firms. A chain like Darden Restaurants, the parent company of Red Lobster and Olive Garden, is one firm that operates hundreds of establishments. Because of this mistake, many of the businesses counted as small in Bruenig’s graph are actually the individual outlets of large chains. Using the right data—earnings by firm size—his graph would show that people working at companies with more than 10,000 employees earn, not twice as much, but about 40 percent more than those at businesses with fewer than 20 employees.

And now here’s the crucial, missing piece of information: For low- and middle-income workers, there is no wage gap between small and large firms. People in the bottom 50 percent of the income distribution earn about the same working at large firms as they do at small. In other words, the fact that big companies pay more on average is solely a function of the earnings of their highest paid employees.

Even if we leave the incomes of low- and high-wage workers at a firm averaged together, other pieces of information complicate and contradict the notion that big pays more. One is that the gap in average wages between small and large firms used to be wider but has been rapidly shrinking in recent years. If you break the data out by industry, you’ll see that the gap has vanished in some sectors and reversed in others. Take retail, for example. People who work for retail businesses with fewer than 100 employees make about 30 percent more per year than those working at chains that have more than 10,000 employees. Even the smallest retailers – those with fewer than 10 employees — pay more, on average, than the biggest chains.

(As for Bruenig’s argument about benefits, his graph shows that nearly all big companies offer health insurance. But it doesn’t show that one-quarter of employees at these firms are not eligible to sign up. Among businesses with 50 to 199 employees, 92 percent offer health insurance, nearly the same rate as large firms, and more of their workers are actually eligible. And while smaller businesses are indeed less likely to provide insurance, that’s very often the fault of a broken health insurance system run by companies that have had little interest in providing plans for either the individual or the small group market.)


As Small Businesses Disappear, Workers Lose Leverage

The last few decades have been dismal for both workers and small businesses. Average hourly wages, adjusted for inflation, are virtually unchanged since the 1970s, and income inequality has reached levels not seen since the 1920s.

Small businesses, meanwhile, have been declining in both numbers and market share for decades. In the ten years between 2005 and 2015, the number of small retailers fell by 85,000; small manufacturers saw their ranks decline by 35,000; and about half of all small banks and credit unions disappeared. It’s not only that existing businesses are closing; there are far fewer startups. The number of new businesses launched each year has fallen by two-thirds since the 1990s. Most industries are now dominated by a few giant companies.

There’s growing evidence that these trends are interrelated, and that, by structuring the economy to weaken small businesses and impede startups, policymakers have left workers across the economy with less leverage to secure better wages.

There are at least two facets to this loss of leverage. For one, the lack of new and growing small businesses has suppressed the primary engine of new job creation. This has reduced the demand for labor and left workers with fewer options for employment. And second, workers today have less ability to walk out on their employer and succeed by starting their own business.

With fewer pathways to get ahead, people are more vulnerable than ever to having to take whatever work they can get, from part-time jobs at Walmart to piece-rate “flex” gigs delivering packages for Amazon in two-hour stints.

Indeed, recent research has found that consolidation is one of the main reasons that wages have been so stubbornly stagnant. Just a few companies now monopolize most local labor markets, which means there’s no longer sufficient competition for workers. (The technical word for this is actually “monopsonize.”)

Meanwhile, large corporations are distributing the spoils of their market dominance to both their shareholders and top employees. At large firms, incomes for high-level employees have been rising rapidly. According to a 2015 study that analyzed data from 15 countries, income inequality has grown faster in places in which the average size of firms has increased, while countries with more small and mid-sized businesses have remained more equitable.


The Politics of Dispersing Economic Power

Many Americans have direct experience with these forces in their own lives. They are rightly alarmed about the control that large corporations have amassed, and about how their own power has been diminished in a political economy structured to sideline both small businesses and unions. Many also recognize that small businesses strengthen communities and, in many sectors, provide distinct benefits to consumers that big companies can’t match.

It’s owing to this experience, and not some misguided nostalgia, as Bruenig implies, that 70 percent of Americans have told pollsters that they have a “great deal” or “quite a lot” confidence in small business, versus only 21 percent for big business.

For a long stretch of the 20th century, the left championed small business alongside labor. Both were seen as strategies for dispersing economic power, broadening opportunity, and safeguarding democracy.

Things began to change in the 1970s, when a new generation of liberals broke with many of the tenets of the New Deal and embraced big business. Large companies, they argued, would deliver lower prices for consumers and higher wages for workers. This rising faction supported Ronald Reagan’s gutting of antitrust enforcement, which gave big companies freer rein to elbow aside their smaller competitors, and then elected Bill Clinton, who championed sweeping policy changes that allowed industries such as banking and media to rapidly consolidate.

Over time, public policy has come to support the ambitions of the largest corporations even more. Tax rules, for example, allowed Amazon to pay zero federal income taxes last year, on profits of about $6 billion, while the average effective tax rate shouldered by local retailers is around 25 percent. And, even as capital gushes freely on Wall Street and the outlook for growth is strong, many viable local businesses are unable to get loans to expand.

In his piece, Bruenig echoes many of the arguments that led the left down this path 40 years ago. But abandoning small business was a mistake. Today, if we hope to reverse inequality and rescue populism as a force for good, we should take a hard look at the assumptions that led to that mistake — and correct them.

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Stacy Mitchell

Stacy Mitchell is co-director of the Institute for Local Self-Reliance and directs its Independent Business Initiative, which produces research and designs policy to counter concentrated corporate power and strengthen local economies.