Small Businesses Hire When Their Revenues Rise

In the discussion of why small businesses are not creating as many jobs in the current recovery as they have in past economic expansions, one simple fact has been missed by many observers: small businesses create jobs when they need more employees. And companies need more employees when they sell more products and services.

Data from the recent Wells Fargo Small Business Survey, a quarterly survey of small businesses with no more than $20 million in annual sales, illustrates this pattern clearly. Since Wells Fargo began collecting their data quarterly in the second three months of 2007, the correlation between the percentage of owners who indicated that their business?s revenue increased over the previous 12 months and the percentage who indicated that their business?s employment went up over the same period, has been 0.9. (A correlation of 1.0 means that two numbers move together perfectly, while a correlation of 0.0 means that there is no relationship in the movement of the two numbers.)

While fewer small companies decrease employment than suffer revenue declines and fewer small businesses increase employment than experience revenue increases, the two numbers clearly move in concert. Therefore, if we want small businesses to hire more, we need to help them boost their revenues.

Share of Small Businesses with Rising Revenue and Employment:

Source: Created from data from the Wells Fargo Small Business Survey

About the Author

Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

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