Inc's editor-in-chief moderates a round-table debate among four economists over job creation.
Inc. sets out to settle once and for all the Question: Who's really creating the jobs?
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For more than 15 years, a debate has raged over small business's contribution to job creation in the United States. One side holds that small companies create most of the new jobs; the other, that small businesses play only a minor role in job creation. We've wondered how trained statisticians could look at the same numbers and draw such dissimilar conclusions, so we brought together leading experts on both sides of the argument to see if we couldn't at least learn why they disagree. What we found was that, as in most discussions of the new economy, even getting the questions right isn't easy, and there are no simple answers.
Inc.'s editor-in-chief, George Gendron, moderated a roundtable discussion among the four participants conducted on the Internet over a four-month period early this year.
Large-Company Experts
Steven J. Davis, professor of business economics at the University of Chicago's Graduate School of Business. Davis specializes in labor issues and macroeconomics. In his forthcoming book, Job Creation and Destruction (MIT Press, 1995), he argues that large U.S. companies still create most new manufacturing jobs in the country.
Bennett Harrison, visiting professor of political economy at Harvard University's John F. Kennedy School of Government, in Cambridge, Mass. Harrison's book, Lean and Mean: The Changing Landscape of Corporate Power in the Age of Flexibility (Basic Books, 1994), explains how rapid globalization of world markets makes large multinationals the engine of economic growth.
Small-Company Experts
Paul D. Reynolds, Coleman Foundation chair holder in entrepreneurial studies at Marquette University, in Milwaukee. Reynolds has been studying start-ups and measuring the impact of their growth on local and regional economies since 1983.
Zoltan J. Acs, visiting professor of business and public policy at the University of Maryland's College of Business and Management, in College Park. Acs's research focuses on small companies as the prime innovators of the economy. He also coedits Small Business Economics , an international journal devoted to understanding the role of small business in the economy.
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George Gendron: Ever since David Birch first reported on small-business job generation in 1979, a growing body of economic literature and the conventional thinking have held that small companies account for a disproportionate share of all new jobs. Recently, however, other academics have challenged this view, but so far the main effect of the debate has been to confuse, not to illuminate.
I'm asked repeatedly -- by elected officials and policy makers, by business leaders in companies large and small, by marketers -- "When it comes to all this job-generation stuff, what's the truth?" So my first question is, When it comes to all this job-generation stuff, what's the truth?
Paul Reynolds: The data from the United States and other developed countries are pretty clear: each company-size category generates jobs in roughly the same proportion to that category's share of total employment. In other words, firms with 500 or more employees employ roughly half of the U.S. work force and generate half of the new jobs.
Bennett Harrison: A tiny fraction of the companies started during a given time period account for most of the job growth that follows later. This pattern will vary by industry sector and by stage in the business cycle, but the hazard rate for start-ups -- what organizational-studies people call the "liability of newness" -- is huge. Dun & Bradstreet economists think that the small number of start-ups that do grow are born large; the maturation of the 10-person garage shop into a big firm is extraordinarily rare. I think that's right.
Steve Davis: What share of net job creation are smaller employers responsible for? The answer is highly sensitive to the time period, regardless of how you measure growth rates or employer size. To take an extreme and contrived example, suppose that in 1995, U.S. employment rose by 10 jobs, and small-business employment rose by 10 jobs. Then you could argue that "100% of net job creation during 1995 happened in the small-business sector." Or if you wish to be shrill, you could say, "Small businesses accounted for 100% of job creation during 1995!"
Those statements would be true, but they convey a misleading picture of job creation in an economy with millions of new jobs created by both large and small employers.
Gendron: Well then, if you can use net job creation to convey any picture of the economy you want, what's a more useful way to look at the numbers?
Davis: It is the share of gross job creation accounted for by small companies that is closely related to their share of total employment. Small businesses typically account for a larger share of job creation in sectors where they also account for a larger share of jobs. So in one sense, small businesses account for a disproportionately large share of job creation: they show higher rates of gross job creation.
That's the good news. The bad news is that smaller businesses also show higher rates of gross job destruction. Put simply, employment levels are more volatile at smaller employers.
Gendron: Job destruction is always bad?
Reynolds: There are two basic processes that lead to job creation. One is a natural or base level of turnover among existing businesses: one restaurant folds, and another takes its place, perhaps in the same location. This process accounts for perhaps 75% to 80% of the turbulence among firms. The second process involves the redistribution of jobs across industry sectors: a typewriter-repair shop closes, but a shop that recharges laser-jet printer cartridges starts up.
