Entrepreneurial Firms and Job Creation: Size Matters Not

30 October 2010 at 11:51 pm 3 comments

| Peter Klein |

The view that small and new firms create a disproportionate share of new jobs is one of the most important stylized facts of the entrepreneurship literature. But, as always, the devil is in the details. Small and new firms naturally grow at a faster rate than their large, mature counterparts, ceteris paribus, simply because they have few employees to start with. But they differ on a number of other grounds and have a higher hazard rate. What’s the bottom line?

John Haltiwanger, Ron Jarmin, and Javier Miranda have taken a close look at the US data and conclude that age, not size, is what matters.

There’s been a long, sometimes heated, debate on the role of firm size in employment growth. Despite skepticism in the academic community, the notion that growth is negatively related to firm size remains appealing to policymakers and small business advocates. The widespread and repeated claim from this community is that most new jobs are created by small businesses. Using data from the Census Bureau Business Dynamics Statistics and Longitudinal Business Database, we explore the many issues regarding the role of firm size and growth that have been at the core of this ongoing debate (such as the role of regression to the mean). We find that the relationship between firm size and employment growth is sensitive to these issues. However, our main finding is that once we control for firm age there is no systematic relationship between firm size and growth. Our findings highlight the important role of business startups and young businesses in U.S. job creation. Business startups contribute substantially to both gross and net job creation. In addition, we find an “up or out” dynamic of young firms. These findings imply that it is critical to control for and understand the role of firm age in explaining U.S. job creation.

Entry filed under: - Klein -, Entrepreneurship, Myths and Realities.

Another Proud Non-Voter Entrepreneurial Paradoxes

3 Comments Add your own

  • 1. Rafe  |  31 October 2010 at 3:55 pm

    Is the guy with the green sword destroying jobs or creating them?

  • 2. SkepticProf  |  31 October 2010 at 7:01 pm

    This is a really important study; disambiguating “small” vs. “new” isn’t possible without these detailed Census data.

    Note that it’s impossible, however, using this system of measurement, for it to be found that new businesses destroy jobs — they obviously are net hirers (having started from 0.)

    But at least two indirect ways that new firms destroy jobs suggest themselves. New firms starting up siphon high-quality employees from existing firms; if successful, they also make badly-run incumbent firms go bankrupt, which destroys jobs.

  • […] the key determinant of job creation in the US, as is often argued in the media and policy circles. (HT: Peter Klein at O&M) They find that it is young firms, which happen to be small, not small firms in general that […]

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
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