Who Creates Jobs?

The younger companies are, the more jobs they create, regardless of their size.

The popular perception that small businesses create most of America's jobs has been the focus of heated debate for three decades. However, the more telling characteristic for predicting job creation is the age of the firm, not its size, according to a new study by John Haltiwanger, Ron Jarmin, and Javier Miranda. In Who Creates Jobs? Small vs. Large vs. Young (NBER Working Paper No. 16300), the researchers conclude that the younger companies are, the more jobs they create, regardless of their size.

Of course, all startup firms operate in a volatile "up or out" environment. After five years, many of these young companies are "out" -- they fail and, as a result, destroy nearly half of the jobs created by all new companies. Nevertheless, the surviving firms continue to ramp "up," growing faster than more mature companies, and creating a disproportionate share of jobs relative to their size.

"Firm startups account for only 3 percent of employment but almost 20 percent of gross job creation," the authors write. "[T]he fastest growing continuing firms are young firms under the age of five," the authors conclude.

In this study, which relies on data from the Census Bureau, the authors confirm that smaller companies created more jobs than larger companies during 1992-2005. But the importance of firm size depends very much on the assumptions one makes about the base year of the analysis, the number of employees used to define "small", and other factors. The real driver of disproportionate job growth, they find, is not small companies, but young companies. It is the startup firms that generate the surge of jobs that earlier research attributed to small companies.

Indeed, grouped in traditional ways, businesses tend to create jobs in proportion to their importance in the economy. Thus, large mature firms – those more than ten years old and with more than 500 workers – employed about 45 percent of all private-sector workers and accounted for almost 40 percent of job creation and destruction in this study.

-- Laurent Belsie