Young companies, that is. I’ve been meaning to write on this subject since I read the journal article last month and John Robertson’s post at macroblog gives me an excuse to do so. The prevailing wisdom is that small companies are the engine of economic growth, doing most of the hiring. It ain’t necessarily so:
Economic research published last month by John Haltiwanger, Ron Jarmin, and Javier Miranda provides some compelling evidence on the relationship between firm size and job growth. It turns out that the age of a firm is important independent of its size. In particular, the paper finds no systematic relationship between net job growth rates and firm size after controlling for firm age. To quote from the paper’s abstract:
“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. … 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.”
This finding doesn’t imply that firm size is irrelevant, but size matters mainly because, conditional on survival, young firms grow faster than older firms and tend to be small. In other words, because start-ups tend to be small, most of the truth to the popular perception that small businesses create the most jobs is driven by the contribution of start-ups to net job growth.
Companies tend to start out small and, if successful, may get bigger. That much is pretty obvious. But a little less obvious is that it isn’t small companies that are the engine of jobs but new companies.
And therein lies the rub. Old, established companies have learned to wield their wealth and positions to prevent upstarts from infringing on their turf. If we were more interested in economic growth and employment than in preserving the status quo however awful the status quo might be, it might well be that the best way to do that would be to put policies in place that encourage the formation of new companies. Policies that come to mind that would do that include greater regulatory certainty, abolition of corporate income taxes, and ending the current policy of propping up old, moribund companies.
Just say No!