This is as perverse and unhealthy as the attitude of parents who hope that their children will never grow up. Census Bureau asserts that the median net employment growth for young firms is “about zero” - an observation perhaps best illustrated by the Small Business Administration (SBA), who found that just one-third of new businesses survive to their tenth year.Īccording to the logic of small business advocates, society should favor firms when they are small, but as soon as they add their 501st employee, they become the object of indifference or even derision. “The obvious pattern, and one that has been largely ignored in previous studies,” writes Jonathan Leonard, an economist at Berkeley whose research focuses on labor market regulation, job turnover and incentives, “is that small establishments account for most net job loss just as surely as they account for most net job gain.” That’s to say that lots of new firms hire workers, but most proceed to lay them off when they go out of business. The problem is that these new firms also destroy jobs, as many go out of business soon after they start. Nevertheless, a widely cited study for the Kauffman Foundation, a foundation devoted to supporting entrepreneurship, found that all net job growth comes from firms less than one year old - that is, startups. Just as young children grow faster than adults, young firms grow faster than mature ones. The authors of the 2010 study found that after controlling for firms’ age, “the negative relationship between firm size and net growth disappears and may even reverse sign as a result of relatively high rates of exit amongst the smallest firms.” In other words, it is not the size of the firm that matters in job creation, it is the age. Other recent research has drilled down and found that it is not small firms per se that create most jobs, only new ones. Only favoring firms when they are small is as perverse and unhealthy as the attitude of parents who hope that their children will never grow up. And a study by American Express and Dun & Bradstreet found that mid-market firms - that is, companies larger than small businesses but smaller than big businesses - with revenues between $10 million and $1 billion were responsible for 92 percent of the net new job creation from 2008 to the end of 2014. A study in 2010 found that large firms more than a decade old with more than 500 workers employed 45 percent of private-sector workers and accounted for 40 percent of job creation. Other studies found less compelling or even contradictory results. In attempting to replicate Birch’s work, the economist Catherine Armington found that from 1976 to 1982, small firms were responsible for 56 percent of new jobs, a far cry from over 80 percent and much closer to their actual share of total jobs. Still others have added the wrinkle that it is not small firms that are the big job generators but new businesses. To be sure, some economists have come to similar conclusions, but many others have criticized them, finding significantly different results. The problem, of course, is that Birch’s findings simply don’t hold up. Years later, the sentiment is still being hammered into the American psyche by small-is-beautiful advocates and presidents on both sides of the aisle. Now a host of small business preferences, from tax breaks to regulatory exemptions to procurement favors, could be justified, not by the old-fashioned argument that small proprietors are the pillars of a democratic society but because small businesses are the most important job generators, the backbone of the economy.ĭespite Birch later admitting that his results were a “silly number” that he could change “at will by changing the starting point or the interval,” his claim has been endlessly repeated, like an urban myth, getting larger and larger, and even being garbled into claims that small business is responsible for all job creation. No longer could economists and policymakers simply assume that large corporations were the big job generators. This article is adapted from Robert Atkinson & Michael Lind’s book “ Big is Beautiful: Debunking the Myth of Small Business.”
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