Some of you may have seen this meme on social media recently as local and small businesses vie for holiday dollars that seem destined for chain and box stores.
Local business v small business
The first misrepresentation is that many will mistake a local business for being the same thing as a small business which is incorrect. While a local business is one that provides goods and/or services to a local population, a local business can also describe a franchise or corporate branch. Likewise, a small business is defined by the number of employees, total value of assets, and various other criteria, but none of which insists that the business must be local.
So when buying from a local business or a small business, a consumer may still be investing money into a corporation just as much as when a consumer buys from a chain or box store. In other words, buying from a local or a small business may not put much extra into the local economy.
Dollars and economy
Now while it’s true that dollars are part of the America’s currency, there’s also the Australian dollar, the New Zealand dollar, the Bahamian dollar, the Bermuda dollar, the Jamaican dollar, the Cayman Islands dollar, the Fiji dollar, the Liberian dollar, the Taiwan dollar, the Namibian dollar, the Rhodesian dollar, the Zimbabwe dollar, the Solomon Islands dollar, and other dollars in other countries.
For the purpose of this discussion, let’s assume these are American dollars and that the economy involved is the American economy. If readers and visitors would like to apply the math and logic to other economies where dollars are used, please feel free to do so and to post your findings in the Comments Section below.
But let’s get back to this meme as it pertains to the American economy.
The claim being made is that spending $100 per person locally (which is what the meme really means to imply but doesn’t state properly) will translate into $3 million more in the local economy. It’s a nice sentiment, but is it accurate?
When $100 is not $100
Keep in mind that the $100 per person spent will not translate into $100 going directly into the local economy. In fact, data collected and analyzed for Portland (ME) proved that for every $100 spent at locally owned businesses, only $58 of those dollars went into the local economy. In a similar study done in New Orleans (LA), $100 spent in locally owned businesses translated into $32 of those dollars going into the local economy.
So $100 per person spent in locally owned businesses translates into less money going into the local economy. How much less depends entirely on the location being discussed.
For $3 million dollars to be generated in Portland (ME), 51,725 people would have to spend $100 dollars in locally owned businesses without spending less money in chain or box stores since chain and box stores also contribute financially to the local economy. In New Orleans, that economy would need 93,750 people to spend $100 dollars in a locally owned business, again without spending less money in chain or box stores.
When $3 million isn’t $3 million
Would $3 million dollars added to the local economy result in thousands of jobs every year? Many would think so, however, other expenses would eat into that extra $3 million dollars in the economy, not the least of which would be local, state, and federal taxes (because, as we all know, individuals aren’t the only ones paying taxes).
Although corporate taxes at the Federal level are between 15% and 35%, the average is 20%. This means that $3 million dollars, taxed Federally at 20%, becomes, $2.4 million dollars. Most State tax rates are based on the Federal rates, and so another 20% diminishes that $3 million to $1.8 million.
Thousands of new jobs created
Hiring a new employee also costs more than just the dollar per hour amount. In fact, a new employee costs his or her employer 18% to 26% more than his or her base wage. In other words, an employee earning $10.00 per hour (or $1,640 per month) will earn $19,680 per year but the employer will pay out anywhere between $23,220 and $24,800 per year. If the employee needs to be trained, that’s extra on top of that amount.
When you divide $24,800 into 1.8 million dollars the answer is 72 1/2. If you don’t believe me, do the math. $1.8 million creates 72 full-time jobs that pay $24,800 per year (or $10 per hour) and 1 part-time job. Even if the State tax was eliminated completely (as it is in some States), in those States, only 145 full-time jobs would be created.
No matter how you slice it, that’s a far cry from the thousands of jobs the meme trumpets.
Chain and box stores take away from the economy
While that is just as true as saying that local and small businesses take away from the economy, chain and box stores also add to the economy. Employees at chain and box store live in the community and spend their money in the community. They pay rent or mortgages and utilities. They buy groceries and make medical appointments to see doctors, dentists, and specialists.
People who work at chain and box stores in your community generally don’t commute from another state for work (although there are some instances where they do).
Additionally, chain and box stores put money back into the local economy. It’s just not as much as locally owned business do. In Portland (ME), chain and box stores return 33% of their revenue to the local economy while in New Orleans (LA), they return 16% of their revenue to the local economy.
In the end, boycotting chain and box stores will actually hurt the local economy, and that’s something important to remember when making decisions as to where you’ll be spending your dollars and cents this season, and going into 2015.
Spending at locally owned stores instead of chain or box stores
While it’s important to support locally owned stores, keep in mind that when the revenues at chain and box stores drop, so does their return of revenue into the local economy. If the drop is significant, employees at chain and box stores are laid off, fired, or see their hours severely cut back, which impacts on the money that is put back into the local economy on a corporate as well as on a personal level.
As long as people are living on tight budgets, there will always be need for chain and box stores. And as long as people need to pay bills, there will always be opportunities for employment at chain and box stores as well as at fast food restaurants and other minimum wage entry-level jobs.