An interesting editorial from Investors.com – do you agree or disagree?
By BRIAN HAMILTONÂ
The big economic question of the day/week/year is when is hiring going to pick up and the unemployment rate going to drop? The key is not held in the proposed or approved plans of either the Democrats or Republicans; the key is in privately held companies in the United States.
The Small Business Administration estimates that 65% to 70% of new jobs are created by companies with fewer than 500 employees, the vast majority of which are privately held. Until these companies hire people, the unemployment rate will remain largely stuck and too high.
One absent factor in discussions around this issue is the relationship between private company revenues and employment. It seems as if the unemployment conversation almost always turns political and that some crucial facts are left unguarded.
Revenues of private enterprises fell an average 5.8% in 2008 and 4.7% in 2009 â€” significant and devastating decreases since these are compounded and consecutive results. Profits are derived solely from revenues, so what do small-business owners do now when profits are down?
They can go out of business or they can cut their highest costs â€” people.Â By far, labor and salaries are a company’s most significant costs, representing up to 80% of each revenue dollar.
Smaller businesses typically have to keep their profits about the same each year since their profits are what they use to pay their personal bills; profits are their personal operating capital.
The people who run these businesses are like the rest of us â€” they have bills to pay. Until they see revenues rebound, they will not hire, and the unemployment rate is likely to remain a dismal statistic.
It is important to also consider that there are 27 million companies in the U.S., only 4,000 to 5,000 thousand of which are publicly traded. The vast majority of economic activity is generated by privately held companies.
Interestingly, the revenues of publicly traded companies are rising at the current time, but revenues of privately held companies are going down, which is troubling. It is also unusual to the extent that smaller companies tend to be more adaptive to economic conditions.
So the final question is: What, if anything, can “we” do to stimulate demand and revenues for these companies? That is exactly where all agreement ends.
Republicans say that health care reform has stalled businesses from hiring, which is a strong argument since the legislation calls for significant expense increases after hiring a 50th employee. Most fast-growing companies (those that create jobs) are smaller ones, and this group of businesses will rightfully pause when their head count reaches this threshold.