Small Business Job Growth in Today’s Hot Labour Market Depends on Business Size


Payrolls of “small” enterprises keeping up, while “micro” businesses lag

After a few tepid years, the Canadian labour market has picked up since early 2017. But how much are small businesses sharing in the growth? That seems to depend in large part on just how small a small business is.

We find a substantial gap between the fairly solid job growth registered by “small” enterprises—those with 20 to 99 employees—and weak growth among “micro” enterprises with fewer than 20 employees. Unlike their slightly larger counterparts, the recent broad hiring strength in the Canadian labour market hasn’t translated into much employment increase at Canada’s smallest businesses.

Job growth at micro-enterprises has slowed

Aside from the 2008-09 recession, job growth among businesses with 20 to 99 employees since the early 2000s has typically matched or exceeded the economy-wide rate. Since 2011, this group’s annual payroll growth has averaged 2%, compared with the 1.5% pace of overall growth. By contrast, job growth of micro-enterprises with fewer than 20 employees has averaged just 0.9% over this period.

Some of this growth gap is to be expected. Employment at larger small businesses tends to be more sensitive to the economic cycle than employment at micro-enterprises. More striking is that, as the Canadian labour market has gained steam since the start of 2017, job growth among micro-enterprises has hardly responded. In 2018, micro-enterprise job growth matched its 2011 pace as slowest since the recession. Meanwhile, job growth at larger small enterprises has picked up, outpacing broader job growth in 2017 and lagging slightly last year.

Why is there a job-growth gap between small and micro-enterprises?

Falling entry rates among new businesses are a potential longer-term factor explaining why job growth at micro-enterprises typically lag other small businesses. Since smaller establishments are more likely to start up or shut down than larger ones, a slowdown in the overall net rate of business formation—entrants minus exits—probably has a greater impact on micro-enterprise job growth than on growth at businesses of other sizes.

The slowdown in Canadian business entry rates dates back to the 1980s. Despite an uptick in 2018, the net business entry rate remains below what it was during the mid-2000s, including between 2006 and 2008, which were stronger years for micro-enterprise job growth. To the extent slower business formation explains the job growth gap between small and micro-enterprises, this disparity may not be a concerning signal regarding the health of existing micro-businesses, as opposed to the creation of new micro-businesses.  

What’s less clear is why the gap between job growth at smaller and micro-enterprises has widened so much since the start of 2017. One possibility is that weaker micro-enterprise growth reflects unfavourable economic factors unrelated to the state of the labour market, like greater competition from large businesses.

Alternatively, micro-businesses might be having a tougher time hiring workers than slightly larger ones, particularly in today’s low unemployment environment.  But, it’s tough to find a smoking gun in the data showing this.

One reliable way to attract workers in a tight labour market—raising wages —doesn’t seem to explain the gap. Average weekly earnings at micro-enterprises in 2018 were basically the same as at other small businesses and have grown at a slightly faster rate over the past two years.

It’s also possible that micro-enterprises are less able to broaden their candidate searches than larger ones—another important strategy to find workers in a tight labour market. For instance, hiring an inexperienced candidate could put a greater strain on the operations of a five-employee business than on one with 50 workers. Unfortunately, there aren’t data available to gauge whether Canadian micro-enterprises are less flexible in hiring standards than others.

Provided the broader economy remains in good shape and unemployment stays low, reports of hiring difficulties from a range of businesses of different sizes are likely to persist. This is particularly the case in sectors like construction, where small businesses have an outsized presence and unemployment has dropped sharply. Nonetheless, larger small businesses seem to be navigating the tighter labour market well. Payroll growth at these enterprises has typically matched or exceed overall job growth in recent years. In contrast, micro-enterprises are the ones lagging, particularly during the recent spurt in the job market. What still needs to be explained is why.

Methodology

Statistics Canada’s Survey of Payrolls, Employment, and Hours (SEPH) tracks quarterly payroll numbers by enterprise size. “Enterprises” consist of one or more “establishments” under common ownership or control. For example, a construction company with multiple establishments across Canada is considered a single enterprise. We focus on enterprises with fewer than 100 employees, which in 2018 accounted for 39% of Canadian payroll employment (excluding unclassified industries). Overall, small enterprises with 20 to 99 employees and micro-enterprises with fewer than 20 employees employ roughly similar numbers of workers.

Statistics Canada tracks business entry and exit rates at the establishment rather than enterprise level.  

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