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Small Businesses Are Overrated

We shouldn’t fetishize mom and pops. They offer lower wages, skimpier benefits, and inferior labor protections.

A grocery store in Denver. Bradley Gordon / Flickr

As the anti-monopoly movement has picked up steam in important policy circles, some have begun thinking that small business promotion is a good idea. This seems to be partially driven by the technical view that small businesses are a way to counteract corporate concentration and partially driven by the more ideological and aesthetic view that there’s something inherently just and beautiful about small-time entrepreneurs and mom and pop shops.

In reality, small business promotion is mostly a bad idea. Small businesses pay lower wages, provide worse benefits, are often exempt from important worker protections, and are incompatible with the way unionization works in the US.

Wages

According to the Quarterly Census of Employment and Wages (QCEW), smaller employers pay their workers considerably less than larger employers. In the first quarter of 2017, firms with five to nine employees paid an average weekly wage of $849. For firms with one thousand or more employees, the wage was $1,793.

The wage premium enjoyed by workers in large firms has been documented for a long time and is present within most sectors and sub-sectors of the US economy.

Benefits

The wages reported in the QCEW exclude certain benefits, such as health insurance. When you include those, the picture looks even worse for small businesses. In 2016, around 20 percent of firms with zero to nine employees offered health insurance. For firms with one thousand or more employees, it was 99.8 percent.

This is to be expected, of course. In addition to small businesses providing their workers lower overall compensation, they also have less ability to construct the same elaborate benefit systems that larger employers can. It is very time-consuming to construct a welfare state, but that is what the American system asks employers to do. Larger employers tend to have the resources to make welfare systems for their workers while smaller employers do not.

Labor Protections

The US labor code provides a variety of protections for workers in the country. But small businesses are generally exempted from those protections. The table below shows how many employees an employer must have before they are covered by major employment protections.

Protection Statute Covered Employers
Racial Discrimination CRA 15+ Employees
Gender Discrimination CRA 15+ Employees
Religious Discrimination CRA 15+ Employees
Disability Discrimination ADA 15+ Employees
Age Discrimination ADEA 20+ Employees
Medical Coverage After Discharge COBRA 20+ Employees
Family and Medical Leave FMLA 50+ Employees

The National Labor Relations Act, which protects the rights of workers to act collectively and organize into unions, does not require an employer to have a specific number of employees to be covered. But, constitutionally speaking, only employers whose activity in interstate commerce exceeds a minimal level are subject to the NLRA. In practice what this means is that smaller businesses, defined in terms of gross revenue as opposed to number of employees, are exempted from the NLRA.

Even for workers in small businesses that are big enough to be covered by the NLRA, unionization is often not practical. Under US labor law, unions are organized on the establishment level, meaning employer by employer and worksite by worksite. Because union representation has a lot of fixed costs, it is not economically feasible in many cases to represent small units of workers.

Against Small Business Fetishism

America’s enthusiasm for small business remains remarkably high. Seventy percent of Americans say they have a “great deal” or “quite a lot” of confidence in small business. For big business the same figure is 21 percent. Both major parties can be seen singing small business’s praises, Democrats as a wholesome alternative to big corporations and Republicans as capitalism’s friendly face. But small businesses can be just as bad as large businesses and are, on average, much worse. They offer lower wages, skimpier benefits, and inferior labor protections.

This isn’t to say small businesses are totally useless. The creation of new businesses, which often start out small, is one of the ways that innovation gets injected into the system. But there is a difference between supporting small entrants in order to keep open an important channel of innovation and supporting an economic structure that seeks to keep businesses permanently small. The latter would probably be a disaster — especially for workers.