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Small Businesses’ Share of Employment:
Charting the Course over the Last
Three Decades
Brian Headd
At the time of the American Revolution, our nation was primarily composed
of the self-employed and small business owners. A glance at the list of men
who signed the Declaration of Independence reveals a roster of self-employed
and small business owners, with farmers, lawyers, and merchants dominating.
As the United States grew, so did its businesses, and today the history of our
country is also the history of small businesses growing into bigger ones.
However, since the late 1970s, the share of Americans employed by small
businesses (firms with fewer than 500 employees) has been on the decline.
With large firms increasingly dominating U.S. business, we have also seen an
increase in the average firm size. This means fewer opportunities for current
and potential small business owners.
The last 30 years have seen the end of the Cold War, the Gulf War, the war
in Afghanistan, the Iraq War, the aging of the baby boomers, large swings in
the stock markets, the proliferation of personal computers, the Internet, the
cell phone, the tech bubble, double-digit inflation, double-digit unemploy-
ment, and the Great Recession. Wars, economic volatility, and technological
and demographic changes can certainly be expected over such a long period,
but it would have been difficult to collectively predict their impact on small
businesses. But surprisingly, in 1978, the decline in small businesses was actu-
ally foreseen. With the maturing of the Industrial Revolution, Robert Lucas’s
seminal paper predicted a slow, steady decline of small
businesses.1
With a
few decades of hindsight, a decline in manufacturing employment overall, an
increase in service employment, and the coming of the Internet age all seem-
ing to herald a golden era of small businesses, one would be tempted to say
that his prediction was wrong before one looks at the share of employment in
small and large firms.
