Why Small Business Isn’t Hiring

My Case Western colleague, Scott Shane, has a brief item linking the lack of hiring by small businesses to the collapse in home prices.  Specifically, he identifies five reasons the “residential real-estate mess” is holding back small business job creation:

  1. Declining house prices have softened demand for small businesses’ products and services.
  2. Small businesses are overrepresented in the real estate-related industries that have been decimated by the residential housing market collapse.
  3. Small business owners use their homes to obtain business credit.
  4. Banks have tightened lending standards in response to a rising share of non-performing real estate loans.
  5. Small business owners were major customers of residential real estate loans during the boom, making them among the consumers hardest hit from the collapse in home prices.

He concludes:

Waiting for small business owners to begin hiring in this economic recovery has become like waiting for Godot. Rather than continuing to wait (while chanting the mantra that “small businesses are the major job creators in economic recoveries”), we should acknowledge why small businesses aren’t leading job creation this time around and come up with solutions to the residential real estate problems that are holding them back.

Doing this is imperative. Slightly more than half (50.2 percent) the private sector works in small companies. If the residential real estate mess keeps the small business sector from hiring, it will be awfully difficult to reduce our unemployment rate to a reasonable level.