Age or size? Contributions to job creation

Abstract

Small firms have been identified as drivers of job creation, although the evidence on their contribution to net employment growth has been disputed. This article shows that job turnover and firm growth vary systematically across firm size groups and that smaller firms do indeed make an important contribution to new job creation. There is a significant caveat, however; we find that it is not firm size per se that is driving these results but rather firm age. We show that younger firms are consistently more dynamic than older firms. We also find a strong inverse relationship between employment growth and size for young firms, but this declines very markedly for older age groups. This provides some support for the Gibrat’s law prediction that size and growth are independent, but only once the firm has moved beyond the start-up stage.

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Notes

  1. 1.

    See also the reply by Carree and Klomp (1996).

  2. 2.

    A very brief description of the rules can be found here: http://www.citizensinformation.ie/en/money_and_tax/personal_finance/debt/what_is_bankruptcy.html#l1f4da.

  3. 3.

    Downloaded from http://www.census.gov/ces/dataproducts/bds/.

  4. 4.

    Large start-ups and increases in employment are checked by the agency to ensure that they are genuinely new businesses and not new registrations because of name changes or mergers. Foreign-owned “entrants” on the other hand may have establishments already in existance in the country of origin.

  5. 5.

    This article focuses on aggregate effects of entry and exit, but interesting spillover dynamics can exist at the sector level. Examining how firm entry affected employment within and across sectors, Andersson and Noseleit (2011) found that start-up firms in a sector have a positive impact on employment change in the same sector but also that there was the potential for spillover effects in other sectors. Start-up activity in manufacturing and low-end services had positive effects on employment growth in other sectors, apparently due to a demand effect. However, this effect is not necessarily always positive, with start-ups in high-end services having a significant negative impact on employment change in other sectors with structural change through displacement outweighing any positive demand effect.

  6. 6.

    These and other robustness results are available on request.

  7. 7.

    This leads to the further question of what determines start-up size, but this is beyond the scope of the current paper. See Görg and Strobl (2002) for more on this topic.

  8. 8.

    Unweighted results give a similar pattern and are available on request.

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Correspondence to Martina Lawless.

Additional information

I would like to thank Forfás, and in particular Deborah Quinn and Paul Connolly, for providing the anonymised survey data and Patrick Honohan and Gerard O’Reilly for comments. The views expressed in this article are my own and do not necessarily reflect the views of the Central Bank of Ireland or the ESCB.

Appendix

Appendix

See Tables 9, 10, 11, 12 and Fig. 6.

Table 9 Comparison to other Irish data
Table 10 Distribution of US establishments and employment
Table 11 Size transitions for firms 5 years or less
Table 12 Size transitions for firms over 5 years
Fig. 6
figure6

Comparison of US and Irish job turnover rates

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Lawless, M. Age or size? Contributions to job creation. Small Bus Econ 42, 815–830 (2014). https://doi.org/10.1007/s11187-013-9513-9

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Keywords

  • Job creation
  • Firm size
  • Firm age
  • Entry and exit

JEL Classifications

  • J23
  • L25
  • L26