Actually, America Isn't a Small Business Country at All

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Via Economix and Economist's View, I see the Center for Economic Policy and Research released a study (PDF) comparing small business sectors around the world. You might think that America -- distinguish, as politicians say, by our entrepreneurial spirit and our small businesses -- would rank extremely high. But it turns out that, by percentage, the US has one of the world's smallest small business sectors. How is that possible?


First, here's the graph provided by the CEPR comparing self-employment rates around the world:

selfemployment.png

Isn't America supposed to stand for unregulated free market freedom? How do we place below the entire continent of Europe? What's going on here?

The study suggests one possible reason could be (here it is again) health care. Since the US doesn't provide universal health care and the free market for insurance is prohibitively expensive, many Americans who might otherwise look to start a business instead join a company for the tax deductible employer-provided health benefits.

I know there's a lot of skepticism about whether whether employer-provided insurance really hinders American's entrepreneurship, so another explanation might turn to corporate tax rates. It's widely reported that America has one of the world's highest statutory corporate tax rates, but our effective tax rate is actually much lower than many of the countries with higher self-employment rates. As this GAO report (PDF) shows, whether you look at countries with low effective tax rates (like Ireland and Switzerland) or high rates (France, Canada, Germany, Italy), all the named countries have higher rates of self-employment.

Regardless of why this graph looks the way it looks, it's also important to consider why it matters. As Michael Mandel has argued, America has faced a lost decade in some respects. GDP growth has stalled and overall employment has actually dipped in the private sector over the last ten years. America has suffered from an overly optimistic sense of our innovation capacity, he says, in developing new products and in medical and technological ideas. He used our innovation deficit to explain our growing trade deficit (in short: we're producing fewer new things the world wants) but I think it's also keen to point out that a country increasingly dominated by large, slow-moving blue chip companies might not pack the fresh innovative punch of an economy more populated by start-ups trying to edge their way into the markets with entirely new ideas.

Update: Some commenters have correctly pointed out that self-employment is an imperfect approximation of small business health. The report also shows, however, that employment in small manufacturing and computer-related companies is toward the bottom of international comparisons. You can check out those graphs easily here, at Mark Thoma's blog where he makes some good points about how strong social nets could encourage entrepreneurship.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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