Recent Research: Who Creates More Jobs, Small or Young Businesses?

It is often taken for granted that small businesses are the primary vehicle of employment growth in the private sector. While this is debated, academics have struggled to demonstrate a strong inverse relationship between firm size and job creation. A recent paper by John Haltiwanger of the University of Maryland and Ron S. Jarmin and Javier Miranda of the U.S. Census Bureau shows that once the data is adjusted to account for firm age, there appears to be no systematic relationship between firm size and growth. Instead, it is new businesses, of all sizes, that play the most significant role in gross and net job creation.

In Who Creates Jobs? Small vs. Large vs. Young, Haltwanger, Jarmin and Miranda use data from the Census Bureau's Longitudinal Business Database (LBD) to sort out the interaction of firm age, size and growth. Using data on non-farm business sector survival and growth from 1976 to 2005, the authors find evidence that firm size is inversely related to employment growth. Net growth rates tend to be higher for smaller businesses than for larger companies. After adjusting for firm age, however, this relationship disappears. Instead, age seems to be the more important factor in growth. Startups account for only three percent of employment, but almost 20 percent of gross job creation. Youth appears to be more vital to this dynamic than size, according to the authors.

The authors suggest that previous studies that linked business size and growth were hampered by the limitations of their data sets. Other sources have been unable to accurately track the relationships between firm size, age and growth, and often fail to distinguish between net and gross growth rates. The authors suggest that the LBD may be able to clear up other misperceptions that have emerged without access to suitable data.

The key dynamic for startups is "up or out", according to the researchers. Young firms have a much higher likelihood of failure relative to their older counterparts. When these firms fail, however, they tend still to have few employees. If they survive, young firms grow more rapidly than older firms, and, thus, make a disproportionate contribution to net job growth. While the same dynamic has been hypothesized for smaller companies, the empirical data does not bear it out. The relatively high rate of failure among new, small firms is offset by the lower failure rate of new, larger firms and their growth. Small business startups contribute more to new job creation than older, small businesses. In fact, after adjusting for age, the authors found a slight positive relationship between size and growth, indicating the larger businesses may actually create more net and gross jobs.

The findings reveal how vital startups are in job creation. New businesses have a remarkably high rate of gross job creation and destruction. Over a five year period, approximately 40 percent of all jobs created by startups will have been eliminated due to the failure of these new firms. New firms that survive, however, grow more rapidly than mature companies and drive employment growth.

From this perspective, programs designed to assist startups must accustom themselves to the idea that their clients will frequently fail, but successful startups have a disproportionate impact on state and regional employment.

Purchase Who Creates Jobs? Small vs. Large vs. Young ($5) at: http://papers.nber.org/papers/w16300#fromrss.