If small businesses are the principal source of job creation in the US, should consultants be focusing their efforts on small vs. large businesses?

A fundamental understanding of statistics is essential for every consultant to be able to tease the truth from the headlines. It is common to see articles, reports and pundits talk about how one segment of the economy generates most of the jobs. Recently either government, healthcare, small business, energy or technology are sectors with the most economic activity and thus job growth. Usually a graph or a single number will accompany that statement and a lot of philosophy about why the data will lead to a conclusion about the future of that sector.

If we took these proclamations at face value we would be possibly misleading our clients if we were advising them on where to invest. We need to bring a critical eye and logic to this interpretation. Consider the recent news that small businesses created all net job growth over the past decade. The NFIB published a graph on Page 1 of U.S. Private Sector Employment by Size of Payroll that seems to prove the point. Without further investigation, it seems clear: consultants should be looking more closely at small companies to support their active growth.

But looking a little deeper reveals the flaw in this interpretation. It is not small businesses that create most jobs but young businesses (by definition, most new businesses are small). But, we are not done yet. When we separate the newly formed from young businesses, it becomes clear that is new businesses that create almost all the jobs. Furthermore, the younger a business is the higher net job loss it creates. Far more complicated than the dominant headlines would indicate, right? See an enlightening analysis of these data.

Tip: Whether we are looking for new markets for our services or are advising clients on emerging (or declining) markets, consultants need to bring their skeptics hat and a competent statistical capability to interpreting reported data.

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