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Are Big Companies Holding Back the Employment Recovery?

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. Employment data has indicated to us that small and medium-sized businesses have been responsible for much of the employment recovery that we've seen so far.

So are big businesses holding back a more robust employment recovery?

Here with me to discuss is Morningstar's Bob Johnson, director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So let's set the stage and talk about small businesses versus large businesses and how much of the employment market they encompass. The numbers might surprise you.

Johnson: Absolutely. When I looked at them and calculated them for today, I was surprised at how big the gap was myself.

Large corporations, those with over 500 employees, make up only 16% of all employment. So I found that to be really pretty dramatic. And then, you've got the small businesses [50 or fewer employees] at the other end that are about 45%, and in between, the midsized businesses between 50 and 500 [employees] is about 39%. So really the small and medium are the bulk of the employment in the economy.

Stipp: We often hear that it's these smaller businesses that really are the drivers of the economy, but do you think it's quite as simple as that? Obviously, the large businesses have a lot of business transactions that are going on [that may also affect the labor market]. What's the real story there?

Johnson: I think it gets very complicated. You look at the data, and the small business, medium business and large businesses all move at about the same time, and maybe there's something common driving all of them, but certainly employment seems to be across all three at the same time, and it's usually not one totally dominating the other.

Now that said, small business in general tends to grow a little bit faster, and the large businesses grow at a much slower rate--right now they are running at about half the rate in large business employment as they are in small business employment.

Stipp: Could it be that a large business, maybe it's not hiring, but it might be spending money and contracting or using vendors--and that could actually create growth in small businesses. It's just the big businesses aren't actually doing the hiring themselves. They are outsourcing it, so to speak.

Johnson: That's correct, and that's true in a lot of cases that big businesses will outsource something ... And over the last few years, there's been a trend: They always [used to] have a big advertising departments and now they don't; they outsource it all. They might have had somebody inside that was a janitor; now they hire a cleaning service.

So all of those things have probably made the trend look a little bit more dramatic than it is. The reason is that the large businesses are focusing on their core, what they do best, and outsourcing the rest of it to small businesses. So that's why I think you've seen a little bit more growth in the small businesses.

Now you've got things like Google or Facebook--I guess those didn’t stay small businesses for too long--but some of those more creative, innovative businesses at the bottom help [small-business employment growth], but they quickly fall out of the small-business category.

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Stipp: You also have noticed some trends in layoffs and how layoffs occur across the business-size spectrum. What did you find there?

Johnson: Well, there, the large businesses lay off a lot faster and harder than small businesses tend to--probably at a 33% greater rate at the bottom of the recession. The layoff rate was 33% higher at large companies than it was at small companies.

Now, I think part of that might be, as you get down to five-, 10-person companies, you have one purchasing manager, you have one receptionist, you have one bookkeeper, and you can't just lay off one--you can't make the purchasing guy the bookkeeper. But in a large corporation, you've got a little bit more flexibility, and you can say, "I've got 10 people in purchasing; I am going to let one of them go."

Stipp: So, Bob, maybe the big companies when they do layoffs, they are much more dramatic layoffs and they pull the plug harder as you said, but recent trends have shown that we are not actually losing a lot of jobs out of big companies. They might not be hiring or responsible for most of the hiring, but they are also not letting huge amounts of people go right now.

Johnson: That's right. ... In terms of layoffs across business size, I think people are laying off less than they used to. And I think that's really helped the overall employment numbers--which are massive numbers of hires and massive numbers of fires netted against each other each month. And I really think the layoff part of that equation has really died down rather dramatically for large and small.

Stipp: An article in The Wall Street Journal this week suggested that because we’re not seeing a lot of extra hiring going on from some of these big companies, we’re not going to see huge improvement in the employment market. Certainly we’ve seen bigger companies not hiring as many people [as smaller companies], and we discussed some of the trends that might have led to that, but why else do you think big companies [have hired less]? What’s holding them back? Why aren't we seeing the jobs coming out of the big companies, if we are starting to see economic improvement?

Johnson: There are a few things going on, and number one is that large companies have more of their business coming from overseas, and a lot of those overseas markets are serviced from overseas locations. So the employment might even go up at those large companies, but it's outside of the United States, so that’s not really helping our economy and our employment. So that’s certainly been one thing that’s holding back big companies' [U.S. hiring].

Second thing is probably some of them are worried about health care, and it’s kind of unclear what the rules are going to be, and if you fall in a certain size [range] and if you bring on employees now, there is a big question mark about how that’s going to be financed, and who is going to have to pay for it in terms of our health-care plans. So that’s, I think, holding back businesses probably big and small. But the smaller plans have more flexibility than the larger ones, I think.

... And then I would say the third thing [that's holding back employment at] big corporations is that they obviously have, as we’ve seen many stories about, a lot of cash on their balance sheets, and they have taken some of cash and bought equipment to make themselves more efficient. They don’t have to buy health care for a machine. So they've really stepped up what they invest in capital spending, and now they need less people to do the same amount of work.

And it’s not just only on the manufacturing floor anymore, [although manufacturing is] obviously a big part of it--we’ve heard all those stories about factories that had 300 or 400 people and now have 10 computer operators; that’s been true for some time. But now it’s getting fancy in the retail industry even, where they are figuring out which salesmen actually have the best sales, and then they are putting them on the best hours and then not working as many people, or working the less efficient ones, in [slower] times, and in that way really have begun to crank down on some of the employment. So technology, unfortunately, has held back the [employment] numbers, and technology is easier to implement, I think, for large companies.

Stipp: We saw that in 2008 a lot of companies wanted to squeeze out as many efficiencies as they could and really became lean and mean.

So as you are looking at some of these trends, these seem to be bigger secular trends--having more jobs overseas as the world becomes more of a global economy, having these new technologies that you indicate--all of those could mean that we don't see large amounts of hiring from large companies. And again that trend we mentioned earlier of outsourcing certain things. Maybe the large companies don't need to be as big as they did in the past.

So given that and given some of these trends, does that mean that the small and medium-size businesses in your mind and in your forecast, going at the rate they are, will able to really help us sustain an employment recovery on their own?

Johnson: I think they will, and I think that obviously, like we mentioned earlier, they do draw some of their business from big companies, but I think that they have some incentives that they'll do well in the small businesses going forward. And I think the large businesses have always been just a little bit slower growing; I think that’s probably going to continue, but I will say one favorable thing for [increased U.S. hiring] is some of the prices overseas beginning to rise. We all heard about 30% labor increases in China, and obviously some of that business flows to India or Indonesia instead of back to here, but we've gotten some business back from that. So that may be one trend that helps out [increased domestic hiring] on the large-business side.

Stipp: All right--some interesting insights on large versus small businesses and their employment trends. Thanks for joining me today.

Johnson: Great to be here.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.