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Job creation at small businesses lagged behind job creation in the overall economy in 2005, a new report indicates.
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According to payroll services firm SurePayroll Inc.'s year-end report, small firms grew their head count by 0.3 percent last year.

By comparison, total nonfarm employment grew 1.5 percent in 2005, according to the Bureau of Labor Statistics.

That's a reversal from just one year ago.

In 2004, small companies increased their total employment by 4.4 percent, SurePayroll said, while overall employment in the economy grew 1.7 percent.

SurePayroll president Michael Alter said in the report that small businesses weren't able to live up to their reputation as economic turbochargers.

"Small businesses appear to have transitioned from being recovery leaders to recovery laggards," he wrote. Gross domestic product "is tracking on 3.8 percent annualized growth based on the first three quarters of 2005, yet small businesses don't appear to be driving that growth. If they were driving GDP growth, they'd be hiring at a growth rate much higher than 0.3 percent."

Mr. Alter attributed the slowdown in small-business employment growth to several factors:

- The ability of large companies to influence favorable legislation.

- Higher health care and capital costs for small firms compared with large companies.

- Large firms can more easily afford to buy new technology and boost productivity.

- Large companies buy in bulk and enjoy the benefits of economies of scale.

"For the little guy, it's getting harder and harder to compete with the big boys," Mr. Alter said.

There was some good news in the report.

Although small businesses in Texas cut their head count by about 4.4 percent, SurePayroll said, the average wage at a Texas small firm rose 5.7 percent.

Nationally, the average small-business paycheck slipped 0.5 percent in 2005.

The cost of compliance

Those economies of scale don't just apply to things such as buying concrete or office supplies.

Small firms are also at a disadvantage compared with larger firms when it comes to the cost of complying with federal regulations, the Small Business Administration said in a recent report.

The SBA said that firms with less than 20 workers pay an average of $7,647 per employee to comply with everything from tax laws to environmental rules.

The average cost per employee for all firms is $5,633.

"Underlying the significance of this assessment for the U.S. economy is the fact that 90 percent of all firms in the United States employ fewer than 20 employees," the report's authors wrote.

"By comparison, large firms (those with 500 or more employees) account for only 0.3 percent of all U.S. firms," they added.

If small businesses have to pay more, it makes it harder for those smaller firms to compete, the authors said.

In turn, that drives production overseas, where regulation is less burdensome.

In fact, the regulatory cost discrepancy between small businesses and larger firms is starkest in the manufacturing sector, the report said.

"All of these effects, of course, would have negative consequences for the U.S. labor market," the authors wrote.

And it's getting more expensive to meet the laws, rules and requirements of the federal government.

Overall, the cost for businesses and individual citizens of complying with all federal regulations hit $1.1 trillion in 2004, about 11 percent of the national income, the report notes, up 16 percent since 2000 when adjusted for inflation.

Businesses paid about $648 billion of that total.

Copyright © 2006. Dallas Morning News.