Small Business' Big Payoff

Many American cities spend millions building commuter rail lines and stadiums, and luring large corporations to town in the hope of spurring economic development. But a better way to boost local economies may be to support entrepreneurship.

The equation is simple: The more small businesses an area has, the more jobs it will have. Job growth is stronger in cities that have an above-average number of small companies and higher self-employment rates, according to a paper presented at a June conference on entrepreneurship by Edward Glaeser, the Fred & Eleanor Glimp Professor of Economics at Harvard University. Using data from the U.S. Census Bureau for 1977 and 2000, he found that the larger the average size of businesss in an area, the fewer job gains there. A 1% increase in the average number of workers per business, for example, leads to a slight decline, of 0.9%, in employment growth.

Glaeser also found that higher levels of education and increased age explain nearly half the variation in self-employment rates among cities. To encourage small companies, governments should work on fundamentals such as good schools, safe streets, fast commutes, and moderate taxes, says Glaeser. A strong school system not only produces skilled workers, but helps lure workers and entrepreneurs who want to raise children in the community. Says Glaeser: "Thinking about people vs. company-based policies is a central part of good government, because smart people have really been the source of urban success over the last 35 to 40 years."

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