A SMALL BUSINESS RIDDLE

A SMALL BUSINESS RIDDLE

BankRI, Lardaro on the Economy Series
November 2004

Small business is critical to Rhode Island’s economy. In fact, it is safe to say that Rhode Island is primarily a small business state. Not just small business, but very small business. We have precious few companies with 500 employees, which, for some analysts, defines the top end of the small business segment. The data on small business here is very interesting. The most recent data available for Rhode Island is given in the table below. While this might seem like just another table, look closely at the first row, which contains a riddle. According to this table, 17.2 percent of Rhode Island establishments have zero employees!

Rhode Island Private Sector Employment, 2003

	Employers		Employment
Size Class	Number	Percent	Number	Percent
0	5,405	17.20%	0	0.00%
1-4	14,902	47.40%	29,523	7.50%
5-9	4,859	15.50%	32,060	8.10%
10-19	2,932	9.30%	39,451	10.00%
20 - 49	2,057	6.50%	62,602	15.90%
50 - 99	663	2.10%	45,427	11.50%
100 - 249	419	1.30%	64,205	16.30%
250 - 499	100	0.30%	33,867	8.60%
500 - 999	41	0.10%	28,568	7.30%
1000 +	29	0.10%	58,241	14.80%

(Source: RI Department of Labor and Training: http://www.dlt.ri.gov/lmi/es202/size.htm)

What exactly does this mean? Is Rhode Island far ahead of the world in terms of utilizing robots? Do we believe in and rely on ghosts, especially those with substantial job skills? Is this truly a jobless recovery for Rhode Island?

When I first came across this table, I was puzzled. What could this possibly indicate? My next step was to contact the Rhode Island Department of Labor and Training (DLT) who promptly provided a solution to the riddle.

The information in this table is ultimately related to firms and establishments that pay Unemployment Insurance. So, in any given year, a number of these entities either go out of business, or still exist but have released all of their employees. The DLT keeps them on “the books” because they might resume business and rehire employees. So, anyone wishing to analyze employers in terms of the number of workers they employ should eliminate the first row of this table. But, if this is done, one must recalculate the percentages for employers (but not employees) based on firms or establishments that actually employ workers.

When this is done, Rhode Island’s concentration of extremely small firms becomes apparent. The table below makes the 0-employee adjustment, showing percentages of firms with different number of employees and the cumulative percentage for each employment level.

Adjusted Rhode Island Private Sector Employers, 2003

Size Class	Number	Percent	Cumulative Percent
1-4	14,902	57.31%	57.31%
5-9	4,859	18.69%	76.00%
10-19	2,932	11.28%	87.27%
20 - 49	2,057	7.91%	95.18%
50 - 99	663	2.55%	97.73%
100 - 249	419	1.61%	99.35%
250 - 499	100	0.38%	99.73%
500 - 999	41	0.16%	99.89%
1000 +	29	0.11%	100.00%
Totals	26,002	100.00%

Over 87 percent of firms and establishments in Rhode Island have 19 or fewer employees. About 95 percent have fewer than 50 employees. By anyone’s reckoning, Rhode Island is truly a small business state.

This raises two important questions. First, is Rhode Island’s business climate sufficiently geared to the creation of new small firms and expansion by existing firms? Overall, I don’t think it is, but recent efforts by the Economic Development Corporation like Every Company Counts may signify that we are ready to move in that direction. The last question is one I am still mulling: If the overwhelming majority of Rhode Island firms have 20 or fewer employees, how do we judge future success? Is adding a state total of (say) 4,000 jobs, a less than one percent gain, which is usually viewed as a bad thing, all that bad after all?

by Leonard Lardaro