By Ruth Simon 

Employment growth is slow and unsteady at most small firms, with the median small business adding fewer than one full-time position a year, despite the sector's reputation as the engine of U.S. job growth.

About 16% of small firms lost the equivalent of one full-time employee and just 20% added more than two full-time positions, according a new study by the J.P. Morgan Chase & Co. Institute, which analyzed 2015 payroll records for more than 45,000 small firms that are bank customers.

The study highlights the continuing economic challenges facing many small businesses. Most small firms employ just a few workers and struggle with unpredictable results. The lion's share of small-business job gains in the U.S. comes from new businesses being formed, rather than the expansion of older small firms.

"There is a great disconnect between the belief that entrepreneurship in general is a driver of economic growth and prosperity, and the simple fact that most small businesses remain small," said Scott Stern, a professor at the Massachusetts Institute of Technology who studies entrepreneurship.

Cynthia Heathcoe, the owner of Contemporary Living, tried twice over the past two years to bring on another full-time employee for her Palm Beach Gardens, Fla., furniture showroom. Both times Ms. Heathcoe let the new employee go within a few months because, she said, the arrangement wasn't cost effective.

With her business growing, Ms. Heathcoe hired another new employee in December, but only after she redefined the job description to focus on administrative tasks, not sales. "I didn't need another salesperson, but I thought I did."

Eighty-nine percent of businesses with paid employees -- or more than 4.85 million firms -- had fewer than 20 employees, according to 2014 U.S. Census data. These firms account for 17% of workers at companies with employees.

The J.P. Morgan study examined electronic payroll records for firms that had combined balances in checking, savings and other accounts at the bank totaling less than $20 million. The study focused on the period from February to October 2015 in an effort to factor out the biggest seasonal variations.

Employment and payroll spending proved to be "very unstable," particularly for young firms, said Diana Farrell, chief executive of the J.P. Morgan Chase Institute, the bank's internal think tank. "The reality of it is that most small businesses do not have a steady flow of customers and a steady flow of revenue. They have goods months and bad months."

Eric & Christopher LLC, a maker of silk-screened pillows and totes in Perkasie, Pa., has a staff of 11. To meet spikes in demand, it calls on six seasonal employees who typically work from September through November and when the firm receives a big order, as happened in January.

"The last thing I want to do is promise them a job today and then let them go," said co-owner Christopher Kline, noting that a firm of his size can't afford the luxury of keeping extra workers on staff.

Some of the variability reflects the dynamic, messy process of creating a new company, said Arnobio Morelix, a senior research analyst at the Ewing Marion Kauffman Foundation. The J.P. Morgan data suggest that, because small firms tend to have small cash cushions, they are more likely than big companies to adjust hours or head count to meet the ebbs and flows of demand, he added.

Adam Rhodes and his partner, Kevin Atkinson, started Homestead Beer Co. as a sideline in 2012. Two years later, the pair quit their jobs and hired their first two employees. The Heath, Ohio, microbrewery now has 11 full-time and three part-time employees.

"There were a handful of positions we thought were going to be part-time, but the person wound up coming on full-time because the business kept growing," said Mr. Rhodes, who hopes to bring on as many as six more staff in 2017.

Write to Ruth Simon at ruth.simon@wsj.com

 

(END) Dow Jones Newswires

January 18, 2017 06:14 ET (11:14 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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