Study Challenges Small Business Role as Job Creator

A common assumption among policymakers in the US is that small businesses are the primary job creators in the economy. Politicians regularly reference small businesses and “main street” as the heart of the American economy. However, a new study by John C. Haltiwanger, Ron S. Jarmin and Javier Miranda directly challenges this assumption.

This study, entitled “Who creates Jobs? Small vs. Large vs. Young”, was presented as a working paper to the National Bureau of Economic Research in August 2010. The authors of the paper rely on census data to analyze the trends of job creation.

The main finding is that if you control for firm age, “there is no systematic relationship between firm size and growth.” In other words, the age of a business, rather than the size, is a better predictor of whether it will create jobs or not. Of course, the authors did find that younger firms tend to be small businesses.

In a New York Times article discussing the study, John Haltiwanger concedes that start-ups also create a large amount of job destruction in the economy, with more than half collapsing in their first five years. But the study attempts to account for this “creative destruction” and still finds that young firms create the most jobs. Haltiwanger goes on to state that the businesses that survive the first five years are likely efficient and innovative companies that can help contribute significantly to job growth.

Small Business owners and advocates have reacted negatively to the study.  An article by MSNBC quotes three small business owners and advocates who challenge the study. These small business supporters say that “most small business start-ups are a joke” and that the study was completed by “white tower economists” who “rarely have a clue what really happens” and have used the numbers to produce “conclusions (which are) very misleading.”

This strong negative reaction from small business supporters is somewhat predictable At this time, it is unlikely the study will have any effect on small business support. However, as policy makers and economists better understand and test the study’s results, there could be shifts, such as attempting to support businesses based on their age. Currently, the study stands as a single voice in a loud and long discussion of how to create jobs in the US economy.

ACCION Chicago hopes new studies also account for where such “young firms”  start. In terms of equitable and comprehensive community economic development, where those young businesses thrive is just as important.