STRATEGY

The Job Factory

Do small companies really create the most jobs?
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Small Business 2001

At Inc., We're frequently asked questions about small business's role in job generation. Here are our answers to some of the most common queries.

You used to hear it all the time: small companies create the most jobs. Today you don't hear it so much. Is it a myth?
No. The situation is just a little more complex than people thought. If you work in Washington, D.C., you'll still hear the small-business job-creation claim because small-business lobbyists like to trot it out for the benefit of legislators. But nobody writes much about job generation of any sort when the economy is booming. So maybe we'll hear more about job generation this year.

Is it true that small companies create two-thirds of all the new jobs?
You can never say that small companies create x% of all new jobs, regardless of the time frame, because the proportion changes from one period to another. According to the U.S. Small Business Administration, small companies created 76.5% of net new jobs from 1990 to 1995 and 75.8% from 1996 to 1997.

What about more recent data?
Government researchers don't exactly work on Internet time. Besides, not many people have been studying job generation recently.

Well, the figures seem pretty consistent. Wouldn't they be about the same for the past few years?
Probably not. One of the big things that affect job-generation figures is the business cycle. In downturns or early phases of an expansion, small companies usually do create most of the new jobs. As an expansion goes on, big companies start hiring more and more people. In the past few years hiring by big companies has probably swamped small-company hiring. This year may be different because the economy is slowing. We've already seen big job cuts from the Fortune 500.


New companies -- and new branches of larger companies -- are likely to be the ones that will grow and provide jobs, says Zoltan Acs.


Most of the new jobs come from fast-growth companies, what David Birch of the research firm Cognetics calls gazelles, right?
Most do. In fact, the Cognetics 2000 Corporate Almanac reports that from 1995 to 1999 gazelles "generated practically as many jobs (10.7 million) as the entire U.S. economy (11.1 million)." Those figures include the gazelles' international operations as well as their domestic ones. But be careful: the way Birch defines the term, gazelles aren't necessarily small. In fact, the relatively few gazelles with more than 1,000 employees account for nearly half of total gazelle employment. So we can't really say that small companies created all those jobs.

So nobody really knows the answer about job creation?
No. In fact, some researchers at the U.S. Census Bureau have come up with another way of looking at the whole thing. They say what matters isn't the size of the business but rather how long the business has been around. To oversimplify only a little, most of the new jobs come not only from new companies but also from new branches of larger companies. "New jobs come from new establishments, whether they're independent firms or part of large multidivisional firms," says Zoltan Acs, a University of Baltimore economist who was a coauthor (with Catherine Armington) of the census study.

What does that say about who creates the jobs?
New companies and new locations have created essentially all the net new jobs. Companies in the other age categories have created some jobs and destroyed some jobs, but on balance they've wound up producing negative numbers of jobs. The youngest companies have made up all the difference -- and then some.

It's really a different model of what drives economic growth. Before, we were focusing only on small companies. What Acs and Armington are saying is, we should be focusing on new companies and on new branches of larger companies. Those are the folks that are likely to utilize the latest technology and be the most efficient. Those are the organizations that will grow and provide jobs.

The 2001 State of Small Business issue


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Last updated: May 15, 2001




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