The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
- BLS Handbook of Methods
- Bureau of Economic Analysis
- Bureau of Labor Statistics
- Congressional Budget Office
- Economic Data - FRED® II, St. Louis Fed
- Office of Management and Budget
- Statistics: Releases and Historical Data, Board of Governors
- U.S. Census Bureau Economic Programs
- White House Economic Statistics Briefing Room
September 30, 2010
Small businesses are the engine of job growth…or is the story more complicated?
Small businesses typically seek loans to grow their business, hire more workers, or purchase equipment needed to handle more activity. However, business owners have either been unwilling to take on debt or have been unable to find the small business loan opportunities they seek. This message is the one seemingly sent by small business owners who participated in polls such as the NFIB survey and the Atlanta Fed's own surveying efforts highlighted in past macroblog posts (here and here and also on our new Small Business Focus web page).
This week President Obama signed into law a new initiative to try to stimulate borrowing and spending by small businesses. Such policy actions are usually based on the premise that "small businesses are the engine of job growth." However, it is tempting to be skeptical of claims that talk about any large group of individuals or firms as if they are a single, homogeneous unit. Idiosyncratic features such as a firm's industry, location, or age might matter as much as does its size, which would seem to indicate that not all types of small business are equally powerful engines of job growth.
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.
Because of the vital role that young firms appear to play in job creation, understanding the various factors that influence business start-up decisions is particularly important. To quote the conclusion of the paper:
"In closing, we think our findings help interpret the popular perception of the role of small businesses as job creators in a manner that is consistent with theories that highlight the role of business formation, experimentation, selection and learning as important features of the U.S. economy. Viewed from this perspective, the role of business startups and young firms is part of an ongoing dynamic of U.S. businesses that needs to be accurately tracked and measured on an ongoing basis. Measuring and understanding the activities of startups and young businesses, the frictions they face, their role in innovation and productivity growth, how they fare in economic downturns and credit crunches all are clearly interesting areas of inquiry given our findings of the important contribution of startups and young businesses."
One of the goals of the Atlanta Fed's new small business web page is to feature data, information sources, and research that helps disentangle the complex contributions of small businesses to economic growth and development. This web page will also highlight the findings from specific initiatives sponsored by the Atlanta Fed.
By John Robertson, a vice president and senior economist in the Atlanta Fed's research department
TrackBack URL for this entry:
Listed below are links to blogs that reference Small businesses are the engine of job growth…or is the story more complicated? :
- Behind the Increase in Prime-Age Labor Force Participation
- An Update on Labor Force Participation
- Another Look at the Wage Growth Tracker's Cyclicality
- GDPNow's Second Quarter Forecast: Is It Too High?
- Are Small Loans Hard to Find? Evidence from the Federal Reserve Banks' Small Business Survey
- Slide into the Economic Driver's Seat with the Labor Market Sliders
- The Fed’s Inflation Goal: What Does the Public Know?
- Going to School on Labor Force Participation
- Bad Debt Is Bad for Your Health
- Working for Yourself, Some of the Time
- July 2017
- May 2017
- April 2017
- March 2017
- February 2017
- January 2017
- December 2016
- November 2016
- October 2016
- September 2016
- Business Cycles
- Business Inflation Expectations
- Capital and Investment
- Capital Markets
- Data Releases
- Economic conditions
- Economic Growth and Development
- Exchange Rates and the Dollar
- Fed Funds Futures
- Federal Debt and Deficits
- Federal Reserve and Monetary Policy
- Financial System
- Fiscal Policy
- Health Care
- Inflation Expectations
- Interest Rates
- Labor Markets
- Latin America/South America
- Monetary Policy
- Money Markets
- Real Estate
- Saving, Capital, and Investment
- Small Business
- Social Security
- This, That, and the Other
- Trade Deficit
- Wage Growth