The Decline of Small Business

It wasn’t long ago that President Obama declared small businesses the “backbone of our economy,” yet in the years since, big corporations have come to dominate U.S. employment. (WaPo)

A new Washington Post analysis: Before the Great Recession, most Americans worked for businesses with fewer than 500 employees—now, 53% of U.S. workers are employed by companies with 500+ employees.

• While it’s true that 98% of businesses have fewer than 100 employees, these small businesses employ a shrinking share of the workforce.

The numbers: Small businesses have taken a massive hit in recent years, with some estimates suggesting that one-third closed during the pandemic.

• Per a study conducted by the U.S. Small Business Administration's Office of Advocacy, the small business share of the U.S. GDP fell from 48.0% in 1998 to 43.5% in 2014.

• During that same time period, larger businesses expanded at an annual rate of 2.5%, compared to just 1.4% for small businesses.

The trend: In general, small businesses are experiencing sluggish growth, while the largest firms—those with over 10,000 employees—are expanding the fastest.

Zoom in: Rapid consolidation over the past few decades led to just four grocery chains controlling over 50% of the market in 2022.

• In 1978, grocery firms with 10,000+ employees accounted for one-third of grocery industry jobs, per the Census Bureau’s Business Dynamics Statistics.

• By 2022, these large firms employed about two-thirds of grocery workers.

Stacy Mitchell, co-director of the Institute for Local Self-Reliance, on small business’ place in the American mythos: “The notion of being a nation of small businesses and farmers and people who control their own destiny when it comes to the economy is very much aligned with the idea that we’re a country where we control our own political destiny.”

The politics: There are competing explanations for why small businesses have declined.

• Some blame deregulation and weaker antitrust enforcement, pointing to the explosion of consolidation in the supermarket industry after the Reagan administration stopped enforcing the Robinson-Patman Act, which protected small grocers.

• Others say regulations themselves are the problem, citing studies showing increased complexity in tax and business regulations disproportionately harms small businesses, which are less capable of bearing the costs of compliance.

The vibes: An overwhelming majority of Americans—including both Democrats and Republicans—have positive views of small businesses.

• But the old partisan divide on corporate America has vanished.

• As recently as 2019, a majority of Republicans viewed big business favorably.

• Today, majorities on both sides share a deep distrust of large corporations.

(The chart below shows the share of Americans who say large corporations have a positive effect on the country.)

Context: In large corporations, especially those within the S&P 500, the pay gap between CEOs and average workers is substantial.

• For instance, in 2023, the average CEO-to-worker pay ratio for S&P 500 companies was 268-to-1, with CEOs earning an average of $17.7 million in total compensation.

• Precise data is limited, but small business owners are widely believed to earn salaries much closer to their workers, unlike corporate executives.

Bubba’s Two Cents

Amid broad concerns about wealth inequality, frustration with corporate giants unites both sides of the political spectrum. From Bernie Sanders’ progressive base to Trump’s populist movement, resentment toward elites in Washington and and big business is a rare point of agreement.

But there are defenders of big corporations that make solid points. In a 2018 column for the Wall Street Journal, economists Michael Lind and Robert Atkinson (no relation) argued that the fixation on small businesses as essential to prosperity is misguided. They wrote, “compared to large firms, small firms pay lower wages and provide fewer benefits, injure and lay off their workers more frequently, spend less to protect the environment, are less productive and less innovative, and create a smaller share of net new jobs.”

While those things may be true, I personally have a deep appreciation for small businesses and their role in America. Growing up, I watched my parents run one, experiencing both success and struggle—especially during the Great Recession. Seeing them navigate those challenges gave me massive respect for anyone who takes on that responsibility. The risks can be high, but so can the rewards.

Small businesses give people hope and stand as a testament to American principles that offer the freedom to build something on their own terms. I can appreciate the benefits that large corporations provide workers, but I would hate to see a world where people feel less incentivized to create small businesses.