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Harvard Report: Small Business on the Skids

While corporate profits in America remain near all-time highs, small businesses are struggling. That’s a key finding from “Problems Unsolved and a Nation Divided,” a five-year study from Harvard Business School.

Released last week, the study shows that since the onset of the Great Recession, the total number of businesses with fewer than 500 employees has declined more than 5% – an unprecedented drop off since data became available in 1977.

Still, the report states that the struggles of small businesses began before the economic descent of 2008. Since 2000, large businesses with more than 1,000 employees have grown jobs far faster than businesses with fewer than 100 employees.

The trend is made starkly apparent in post-recession job growth. The workforces of large- and medium-sized firms have rebounded to nearly pre-recession levels. Not so with small businesses, where workforce recovery has been tepid. Indeed, the smallest firms have endured the greatest struggles: Businesses with fewer than 10 employees have lagged the most in job creation.

“While large firms have been able to prosper, small companies are struggling, startups are lagging, and small business is no longer the leading job generator,” Harvard researchers wrote in the study.

In addition, entrepreneurship is on the decline, according to the researchers. In 1978, for example, start-ups comprised nearly 15% of all U.S. firms, but only 8% by 2014. Relatedly, the number of self-employed workers has dropped following the Great Recession; after previous recessions, the number increased.

And the entrepreneurship that is occurring remains isolated in the technology field in select geographic clusters. The report shows that half of the country’s new business establishments between 2010 and 2014 were in just 20 counties. “We find a sharp divergence in new business creation between the continued success of technology-based startups, in places like Silicon Valley, New York and Boston, and the weaker prospects for the average new business across America, and across local and traded industries,” Harvard researchers wrote.

The struggles of small businesses are mirrored in the income levels of most Americans. The median real household income in the U.S. peaked in 1999. It has fallen by about 7% since then. Significantly, income inequality has spiked over the last 35 years, with the largest gains concentrated in the top portion of the top 1%.

“Working- and middle-class Americans are struggling, as are many small businesses. Prosperity is growing, but at a slower rate and for a smaller portion of the population, than in the past,” researchers wrote. “America today, then, is failing the test of competitiveness.”