Today, many years later, the charge lives on. George Kalidonis, a professor at Chicago's Keller Graduate School of Management, refers in a recent article to "Birch's curious practice of counting branch offices of large corporations as 'small businesses.' " Harvard faculty members James Hamilton and James Medoff write in The Washington Post that "Birch generally defined business size by the number of people who work at a given location rather than the number working for the firm in total." Both cite the Brookings figure as evidence that Birch was wrong.
Well, Birch wasn't wrong. He never confused companies with establishments. On the contrary, he had undertaken "the massive task of assembling all the individual establishments into the 'families' (or firms) to which they belong." Eventually, the original disputants realized that their disparate conclusions were due partly to differences in their statistical methods and partly to real differences in the time periods they studied.
Methodological disparities persist. Researchers using the Small Business Administration's database -- the original basis for the Brookings study -- consistently come up with slightly lower estimates of job generation by small companies than Birch's. But the variation is typically small, and it's nowhere near as significant as the variation from state to state and from time period to time period. In recessions, for example, large businesses are typically cutting back their work forces, so small companies are likely to account for 100% of the net new jobs created. In boom times the proportion will be smaller. So it is with states. Minnesota, Massachusetts, and other states with many large, successful technology-based companies, writes Birch in his book Job Creation in America, find a larger share of new jobs coming from big companies. States such as Michigan, dominated by big-but-shrinking companies, find exactly the opposite.
So, what's the truth? Do small businesses generate 8 out of 10 new jobs? Only sometimes -- and only in some places. "When you think about it," says David Birch with a smile, "it's perfectly obvious."
DAVID L. BIRCH
Age: 51
Affiliation: Massachusetts Institute of Technology
Background: Physics
Claim to fame: pioneer in study of job generation
Quote: 'The small-business share of job creation is highly erratic. It varies widely over time and from one state to another.'
PAUL REYNOLDS
Age: 50
Affiliation: University of Minnesota
Background: sociology
Claim to fame: developer of field-tested database
Quote: 'It's a small fraction of these new companies that are making the real contribution. That's a controversial finding -- it implies that public agencies might want to focus their efforts on just these firms.'
JOHN E. JACKSON
Age:46
Affiliation: University of Michigan
Background: political economy
Claim to fame: pioneer in use of unemployment-insurance data
Quote: 'Despite the worst depression in 50 years, almost as many firms started in Michigan as went out of business. In business services, there were three new firms for every two failures.'
WILLIAM B. BEYERS
Age: 48
Affiliation: University of Washington
Background: geography
Claim to fame: pioneer in studying service exports
Quote: 'We found we were looking into a bubbling cauldron of entrepreneurship, laced with expertise, specialization, and exploitation of market niches.'
BO CARLSSON
Age: 46
Affiliation: Case Western Reserve University
Background: economics
Claim to fame: ground-breaking studies of effects of technology on manufacturing
Quote: 'Customers want variety. That undermines economies of scale -- the big firms can't keep those mass-production lines going anymore.'
Where the Jobs Come From
What percentage of jobs did companies with fewer than 100 employees create?
1969-72 82% 1978-80 38%
'72-74 53 '80-82 100
'74-76 65 '82-84 74
'76-78 56 '84-86 53
Source: Cognetics Inc., based on proprietary data and data provided by the Small Business Administration
The Role of the Fast-Growing Companies
How much of the start-ups' contribution comes from the fast growers?
Low growth High growth
All start-ups 73% 27%
New-company jobs 40 60
New-company sales 20 80
New-company "exports" 10 90
The Importance of Service Exports
How many jobs are Seattle's business sectors creating through exports?
Manufacturing 160,400 48%
All service 164,300 49
Resource extraction 2,100 1
Construction 5,400 2
Total number of export jobs 332,200
Small Metalworking Companies' Share of Total Sales
Has the long-term trend to large-scale production been reversed?
Fewer than : 1976 1982 1984 1986
500 employees 30.1% 30.2% 36.8% 39.7%
100 employees 15.6 17.2 21.4 22.5
The Balance Sheet on Manufacturing . . . 1982-84
How did Michigan's manufacturers do following the last recession?
Jobs created by new companies +25,000
Jobs created by existing company growth +177,000
Jobs eliminated by downsizing -39,000
Jobs eliminated by company failures -21,000
NET JOB GAIN +142,000
