Wisconsin, one of five
upper Midwest
states in the Seventh Federal Reserve District, has had major job losses in
the manufacturing sector during the past several decades. In the Seventh
District, comprised of Illinois,
Indiana,
Iowa, Michigan
and Wisconsin,
one of the bright spots in employment is the new jobs generated in the small
business sector.
The Chicago Federal
Reserve Economic Perspectives (in Nov.-Dec. 1986) reported on a national
study prepared at the Massachusetts Institute of Technology (David Birch,
1979). Some startling results regarding the job generation power of small
business were:
-
Most of the
variation in job growth among states and areas is due
to the rate of job generation (i.e., new firms or expansions of existing
firms) not to the rates of job loss (i.e., failures and contractions).
-
Virtually no firms
physically migrate from one geographical area,
particularly interstate. However, branching is quite important,
particularly in manufacturing. Differential branching, not physical
migration, results in many of the regional differences in job growth.
-
The
components of job change are sensitive to business and economic
cycles. In most states, start-ups and expansions of firms were fewer,
while contractions and loss of firms are more numerous during an
economic downturn than during a upturn.
-
In the early to
mid 1970s, the regional jobs generated by very small business vary.
Small firms generated all the net new jobs in the Northeast, 67 percent
in the
Midwest, 60 percent in the West and 54
percent in the South. Birch concludes that: "The job generating firms
tend to be small. . . dynamic (or unstable, depending on your viewpoint)
-- the kind of firm that banks tend to feel very uncomfortable about."
-
In this study,
small firms were defined as those with twenty or fewer employees and
which generated 66 percent of all new jobs in the early seventies.
Middle sized and larger firms, on balance, provided few new jobs in
relation to their size.
Many of these Birch
study findings apply to
Wisconsin. Birch, in a
subsequent research on job generation in
Wisconsin, found that firms with 20 employees
or less dominated the state's job generation process between 1969 and 1981.
(Source: Dun and Bradstreet, 1969-1976.) Complete annual
Wisconsin unemployment data were also analyzed for the
1977 to 1981 period. For the state of
Wisconsin level, Birch found the following:
-
From 1969 to
1979, very small businesses created more than twice as many net new
jobs as their share of total employment might predict, usually more
than all other businesses combined.
-
Only the very
small businesses (20 or less employees) generated more jobs than
they lost during the recession period of 1979-1981 and very small
businesses created the net new jobs in all industry groups,
including manufacturing, even though these very small businesses
have a smaller share of the total employment.
-
The 1979 to
1981 recession period, very small manufacturers continued to add
more jobs than they lost. This was in strong contrast to the larger
manufacturers.
-
New business
start-ups were the most important factor in explaining the ability
of very small businesses to generate the most new jobs, even during
economic expansions and recessions. In addition,
very small businesses tend to expand and grow as their markets and
product lines expand.
-
The job
creation rate of very small businesses through both creations or
expansions is considerably higher than that of larger firms and more
than offsets the job loss rates which are slightly higher than those
of larger firms.
-
Employment
change for larger firms is more sensitive to recession. The relative
fall in shares of employment at expanding firms and the rise in
shares at contracting firms are greater for larger firms than for
the very small business.
-
The services
sector, among the major industrial sectors, is found to be
consistent and somewhat countercyclical source of net new jobs. On
the other hand, the manufacturing sector is more sensitive to
changes in the business cycle and a very cyclical job generator. The
high technology sector is small and not a consistent source of new
jobs.
Wisconsin,
in 1983, was second among the five Federal Reserve District states in
the percentage of employment accounted for by very small businesses.
Iowa had 35% employed in very small business, while Wisconsin had 28.2%. The
overall Seventh District average was 26.7%.
The data reported
in the Appendix were compiled by the UW -Stevens
Point Central Wisconsin Business
Development
Center
from 1983-1984 County Business Pattern Data prepared by the U.S. Census
Bureau.
County Business Patterns excluded government
employees, railroad employees and self employed persons.
The importance of
the very small business to Central Wisconsin, Marathon, Portage and Wood counties as a source of
employment is shown in Figure 1. Very small business (VSB) in Wisconsin employed 28.2% of the employment
total for 1983. During the same period, VSB accounted for 30.7% of
employment in Central Wisconsin. The
following are individual county's percent of employment by VSB for1983
and 1984.
|
|
SMALL
BUSINESS EMPLOYMENT
|
|
|
|
|
(percent of
total)
|
|
|
COUNTY
|
1983
|
1984
|
CHANGE
|
|
Marathon
|
34.0
|
32.7
|
-1.3
|
|
Portage
|
28.8
|
30.1
|
+ 1.3
|
|
Wood
|
27.8
|
28.2
|
+0.4
|
|
Central
Wisconsin
|
30.7
|
30.6
|
-0.1
|
The economic
recovery intensified in 1984. In
Marathon
County the employment
impact of small business decreased. At the same time, there was a
substantial increase in the jobs created by larger business. Overall,
there were more jobs in the county. The source of jobs changed due to
the cyclical increase in the manufacturing sector which tends to be
dominated by larger organizations.
The percent of
employment by VSB using Standard Industrial Classification (SIC) during
1983 is shown in Appendix Figure 2 for the
United States, the Seventh Federal Reserve District
and for Wisconsin. Comparable data were not available
for 1984.
The employment
profile of Wisconsin, as opposed to the Seventh Federal Reserve
District and the
United States in general, presents an
interesting picture of the impact that VSB has on our state. This figure
graphically compares the profiles of each of these areas by industry
type. The table below summarizes the comparative data.
Percent of Employment By Small Firms
|
INDUSTRY
|
U.S.
|
7TH Dist.
|
Wisconsin
|
|
Agriculture
|
60
|
73
|
71
|
|
Mining
|
18
|
22
|
62
|
|
Construction
|
42
|
52
|
58
|
|
Manufacturing
|
14
|
11
|
9
|
|
Transportation
|
20
|
24
|
23
|
|
Wholesale
|
47
|
49
|
45
|
|
Retail
|
49
|
45
|
42
|
|
Finance
|
38
|
36
|
29
|
|
Services
|
39
|
38
|
30
|
Appendix Figure
3.1 summarizes the number of small business establishments in
Central Wisconsin by SIC. The data gives us an inventory of
small business in the region. Government and self employed persons are
not included; agricultural organizations are only those who provide
services and products related to agriculture.
The differences in
the number of establishments between 1983 and 1984 are clear. Between
1983 and 1984 there have been declines in the number of establishments
in both the manufacturing and retail sectors. Conversely, there have
been increases in agriculture, mining, construction, transportation,
finance and services. Wholesale trade has remained relatively constant.
Appendix Figures
3.2, 3.3 and 3.4 graphically represent the number of small business
establishments present in Marathon, Wood and
Portage
counties during 1983 and 1984. These figures demonstrate the changes
that have occurred between the two years in each county while Figure 3.1
demonstrates regional shifts.
The contrast
between the three major counties of this region in regard to their mix
of small businesses merits further study.
Appendix Figure
4.1 profiles for 1983 the percent of small business employment for the
three counties of Central Wisconsin. There is a major difference in the
counties in nearly every major SIC. For instance, both Marathon and Portage have mining, e.g.,
stone quarries or gravel operations, but none are found in Wood. For
construction, nearly all the firms in Portage and Wood counties have
twenty or less employees, while in Marathon only 65 percent of the
construction jobs are accounted for by the very small companies. Ten
percent or less of the manufacturing jobs are accounted for by small
business in each of the counties. For the finance area which includes
banking and insurance, more than 70 percent of the jobs in
Wood County
are provided by small business; while in
Marathon
County, less than 20 percent are from
small business; and in
Portage
County, less than 10
percent are provided by small firms.
Appendix Figure
4.2 provides similar data for the three counties in 1984. There are some
subtle changes from 1983 to 1984. Small manufacturing firms in all
counties have fallen more than one percent in absolute value in just one
year. Wholesale trade has been reduced in
Marathon
County in terms of the
small business contribution to the job creation process. In Wood County,
the finance sector has significantly reduced its small business
employment percentage. In all three counties, the service sector
continues to show growth as a source of jobs.
Appendix Figure 5
presents one of the most intriguing areas for future study
Central Wisconsin
changes in employment by firm size. Information of four sizes of firms
is presented by county. In
Wood County, there is a significant drop in
employment in large firms. This drop is so drastic that there is a
negative impact on Central Wisconsin
overall. In other categories of firms there has been measurable
employment growth in each county.
Marathon had the lowest growth in the firms,
with 1 to 19 employees, the highest growth in firms of 20 to 99, and the
lowest growth in the area of firms employing 100 to 499. Recall,
however, that a percent change Marathon County employment change is significantly larger than
the same percent for Portage or Wood
County
work force changes.
Summary and Conclusions
This paper
demonstrates small business has a significant impact on the job picture
in both Wisconsin
and Central Wisconsin. In the future,
it should be possible to combine County Business Pattern Data with
Central Wisconsin Bureau of Economic Research information to develop a
dynamic data base which will become a credible regional resource for the
further study of small business. From this report we conclude that, on
the whole, small business in Wisconsin
and Central Wisconsin is more important
as a source of new employment than at the national or regional level.
The variances that the report highlights require further study so we can
better consider the consequences for small business in our region.
We have observed that
small business growth has occurred in almost all major classifications from
the years 1983-1984. In addition we have noted those specific industries
where small business accounts for virtually all of the employment. Those
businesses that account for more than half of the employment in their
classification require additional assistance and advocacy to remain viable.
Our findings indicate
a greater awareness is needed at the local, state, and regional levels to
meet the needs of small business. A more efficient service and support
network needs to be established to assure continued growth and development
of this important source of economic development.
References
Erdevig, Eleanor H.,
Chicago
Economic Perspectives-A Review from the Federal
Reserve Bank of Chicago, Federal Reserve Bank of
Chicago, November/December
1986
|
United States Department of
Commerce-Bureau of the Census,
County
Business
|
|
Patterns for Wisconsin, 1983.
|
|
|
|
United States Department of
Commerce-Bureau of the Census,
County
Business
|
|
Patterns for Wisconsin, 1984.
|
|
|
Authors
George E. Seyfarth is the
Executive Director of the Central
Wisconsin
Business
Development
Center,
a unit of the University of Wisconsin-Stevens Point Division of Business and
Economics.
Gerard P. Rodenkirch is a
Research Assistant at the Central
Wisconsin
Business
Development
Center.
Acknowledgements
The authors wish to acknowledge
the assistance of Richard B. Judy, Ph.D., Associate Dean and Head of the
University of Wisconsin-Stevens Point Division of Business and Economics,
and Eleanor Erdevig, an Economist at the Federal Reserve Bank of
Chicago.
Figure 1
Small Business Employment
1983-1984
Figure 3.1
Figure 3.3
Total Business Establishments Portage
Figure 5
Employment Change By Firm Size
1983-1984
