Size-or-Age

CREATING NEW JOBS: YOUNG FIRMS (NOT SMALL ONES) HOLD THE KEY

Younger firms, especially new market entrants, are the biggest creators of new jobs – and it is their dynamism rather than their small size that drives these results. That is the central finding of research by Martina Lawless, which challenges the widely held view that small firms make a disproportionate contribution to job creation.

These results, presented at the Royal Economic Society’s 2013 annual conference, suggest that governments wishing to promote the creation of new jobs might be better off supporting business start-ups than by focusing simply on small firms.

The study analyses a data set of Irish firms covering almost 40 years. It finds that younger firms, and entrants in particular, are the largest contributors to the creation of new jobs. Younger firms are consistently more dynamic than older firms and this holds across all sizes of firms, not just among smaller firms.

The study also finds that small firms tend to have the highest growth rates but this is only when they are new – as firms get older, the relationship between size and growth disappears. The author comments:

‘Many policies of benefit to business do not need to distinguish between whether they are useful to small or young firms, such as those relating to lowering red-tape burdens on firms.

‘But one area where such a distinction may be useful is in policies to encourage ‘early-firm’ funding access, as younger firms consistently report difficulties in access to formal sources of finance across a range of countries.’

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Research being presented at the Royal Economic Society’s annual conference examines the widely held contention that there is a disproportionate contribution of small firms to net job creation. The study investigates if this is the case by examining in detail the rates at which different types of firms create and destroy jobs.

The analysis, by Martina Lawless from the Central Bank of Ireland, shows that job turnover and firm growth vary systematically across firm size groups with smaller firms making an important contribution to new job creation. But it also finds that it is not firm size that is driving these results but rather firm age. The considerable overlap between the two measures, as young firms overwhelmingly tend to be small, has perhaps led to much of the effect of firm age being misattributed to size.

Using a panel of Irish firms covering almost 40 years, the research finds that younger firms, and entrants in particular, are the largest contributors to the creation of new jobs. Younger firms are consistently more dynamic than older firms and this holds across all size classes, not just among smaller firms.

In terms of firm growth and size, small young firms have the highest growth rates, but there is little relationship between size and growth for older firm age groups. This provides some support for the economic prediction that size and growth are independent, but that this holds once the firm has reached a mature state and does not apply to firms at the earliest stages of development.

From a policy perspective, these results imply that an environment supportive of business start-ups might be more effective in generating job creation than policies aimed more generically at specific size classes of firm. Many policies of benefit to business of course do not need to distinguish between whether they are useful to small or young or both, such as those relating to lowering red-tape burdens on firms.

One area where such a distinction may be usefully made, however, is in policies to encourage early-firm funding access, as younger firms consistently report difficulties in access to formal sources of finance across a range of countries.

ENDS


Contact:

RES media consultant Romesh Vaitilingam:
+44 (0) 7768 661095
romesh@vaitilingam.com
@econromesh

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