Spotlight

Small Businesses Are Key to Job Growth in Inner Cities

Locavesting Staff | November 10, 2016

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The inner city was a recurring theme in the presidential campaign. President-elect Donald Trump called inner cities “a disaster,” painting a grim picture of violence, poverty and a lack of jobs. The reality is less stark. Cities have undergone a renaissance in recent years and housing prices have risen. Yet a lack of jobs and poverty are still stubborn issues in some core city neighborhoods.

So how can leaders create jobs and combat poverty in these so-called inner cities? The answer, according to a new report, is to nurture local small businesses.

Small businesses are the biggest job creators in most cities, especially in distressed inner city neighborhoods. And a modest increase in hiring by these firms—by just 1 to 3 employees each—could eliminate unemployment in inner city neighborhoods.

These are the key findings of The Big Impact of Small Business on Urban Job Creation: Evidence from Five Cities, examines Chicago, Dallas, Detroit, Los Angeles and Washington, DC. The report is the latest by the Initiative for a Competitive Inner City (ICIC), a nonprofit focused on driving economic growth in inner cities.

In all five cities, the share of large and small businesses was similar. Large businesses (defined as those having 250 or more employees) make up one percent or less of businesses; firms with 5 to 249 employees make up roughly one quarter, and micro-businesses (one to four employees) comprise roughly three quarters.

In four of the five cities, small businesses created the most jobs, from 53% of jobs in Detroit to 74% in Los Angeles. The share of jobs created by small firms was even higher in distressed neighborhoods: 64% in Detroit, 70% in Chicago, 74% in D.C., and 77% in Los Angeles. The job creation was primarily driven by businesses with between 5 to 249 employees.

Source: ICIC.org
Source: ICIC.org

The study found that most of the inner city residents that are employed work outside of the inner city, and often outside of the city limits, suggesting a need for new businesses located in inner cities as well as public transportation.

Of the cities studied, only Dallas—which has historically relied on attracting big outside companies to drive growth—had more job creation from large firms. Still, small businesses accounted for 48% of jobs in that city.

Echoing other research, ICIC found that if existing small businesses hired just one to three additional employees, it would be enough to give jobs to all currently unemployed inner city residents. A 2011 report by the American Enterprise Opportunity similarly found that if one out of every three micro-businesses in the U.S. hired just a single new employee, the economy would be at full employment.

Thinking Small

ICIC defines inner city as distressed urban areas of concentrated poverty and unemployment. It says the nation’s 328 inner cities that meet that definition are home to 30 million people and represent nearly a quarter of the nation’s poverty. Recent economic data has shown that employment in urban areas has risen in the past several years.

The ICIC research is more evidence that traditional economic development focused on attracting and retaining big, out of state companies, plants and big box stores on the theory that they will create jobs is flawed. In reality, the megadeals rarely live up to their hiring promises and the hefty subsidies granted to these big corporations drain municipal coffers.

However, “small business support in most cities is an uncoordinated, unfocused set of programs implemented by a disparate group of private and public organizations,” the authors write.

The report advises city leaders to support the growth of small businesses with the same resources and intentionality as they do with the attraction of large businesses. Specifically, it suggests five “levers” that city leaders can use to maximize the growth of local small businesses:

1. Create a comprehensive small business plan based on economic assets

2. Expand contracting opportunities for small businesses

3. Design workforce programs for small businesses

4. Coordinate resources and ease burdensome regulations

5. Upgrade the inner city business environment

The full report (pdf) can be found here.

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