Small Businesses and Job Creation

As you’ve probably heard politicians of both parties emphasize, ninety million percent of job creation comes from small businesses — who, with the exception of family farms, are by far the most precious of the Lord’s creations. These factoids have always struck me as a bit oddly phrased, since presumably the really big job growth comes not from small businesses but from firms that are rapidly enlarging from a small base.

Allison Schrager brings the relevant data:

A new paper from economists John Haltiwanger, Ron Jarmin, and Javier Miranda looks at which firms typically create new jobs. Earlier work found that small firms are the ones who tend to create more jobs. This new paper finds that when you control for firm age the small firm effect weakens. Newer firms are the ones who create jobs and because most companies start small, small firms are more likely to create jobs.

That’s not to say that factoids you’ve heard about small businesses are wrong, per se, just that the rhetoric is a little misleading. People enjoy sentimentalizing small-scale mom and pop operations and it’s true that in the aggregate a lot of people work for such firms. But economic growth isn’t driven by those kind of companies, instead it’s driven by small firms that find a way to scale-up. People associate “start-ups” with the high tech sector, but these things can happen in many fields of enterprise. Barnes & Noble used to a neighborhood bookstore, my favorite place to grab lunch near the office is a small chain that started in San Francisco and just now expanded to LA and DC, etc.

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I think, however, that it’s a bit of a mistake to draw too sharp a line between “demand shortfalls” and the kind of organizational and technical innovations that drive firm growth. Entrepreneurs are much more likely to drive themselves to think of ways to expand their operations if they believe overall demand for goods and services is going to be growing.