There's been a long, sometimes heated, debate on the role of firm size in employment growth. Despite skepticism in the academic community, the notion that growth is negatively related to firm size remains appealing to policymakers and small business advocates. The widespread and repeated claim from this community is that most new jobs are created by small businesses. Using data from the Census Bureau Business Dynamics Statistics and Longitudinal Business Database, we explore the many issues regarding the role of firm size and growth that have been at the core of this ongoing debate (such as the role of regression to the mean). We find that the relationship between firm size and employment growth is sensitive to these issues. However, our main finding is that once we control for firm age there is no systematic relationship between firm size and growth. Our findings highlight the important role of business startups and young businesses in U.S. job creation. Business startups contribute substantially to both gross and net job creation. In addition, we find an 'up or out' dynamic of young firms. These findings imply that it is critical to control for and understand the role of firm age in explaining U.S. job creation.
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High Growth Young Firms: Contribution to Job, Output and Productivity Growth
January 2016
Working Paper Number:
CES-16-49
Recent research shows that the job creating prowess of small firms in the U.S. is better attributed to startups and young firms that are small. But most startups and young firms either fail or don't create jobs. A small proportion of young firms grow rapidly and they account for the long lasting contribution of startups to job growth. High growth firms are not well understood in terms of either theory or evidence. Although the evidence of their role in job creation is mounting, little is known about their life cycle dynamics, or their contribution to other key outcomes such as real output growth and productivity. In this paper, we enhance the Longitudinal Business Database with gross output (real revenue) measures. We find that the patterns for high output growth firms largely mimic those for high employment growth firms. High growth output firms are disproportionately young and make disproportionate contributions to output and productivity growth. The share of activity accounted for by high growth output and employment firms varies substantially across industries ' in the post 2000 period the share of activity accounted for by high growth firms is significantly higher in the High Tech and Energy related industries. A firm in a small business intensive industry is less likely to be a high output growth firm but small business intensive industries don't have significantly smaller shares of either employment or output activity accounted for by high growth firms.
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High Growth Young Firms: Contribution to Job, Output and Productivity Growth
February 2017
Working Paper Number:
carra-2017-03
Recent research shows that the job creating prowess of small firms in the U.S. is better attributed to startups and young firms that are small. But most startups and young firms either fail or don't create jobs. A small proportion of young firms grow rapidly and they account for the long lasting contribution of startups to job growth. High growth firms are not well understood in terms of either theory or evidence. Although the evidence of their role in job creation is mounting, little is known about their life cycle dynamics, or their contribution to other key outcomes such as real output growth and productivity. In this paper, we enhance the Longitudinal Business Database with gross output (real revenue) measures. We find that the patterns for high output growth firms largely mimic those for high employment growth firms. High growth output firms are disproportionately young and make disproportionate contributions to output and productivity growth. The share of activity accounted for by high growth output and employment firms varies substantially across industries - in the post 2000 period the share of activity accounted for by high growth firms is significantly higher in the High Tech and Energy related industries. A firm in a small business intensive industry is less likely to be a high output growth firm but small business intensive industries don't have significantly smaller shares of either employment or output activity accounted for by high growth firms.
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Where Has All the Skewness Gone? The Decline in High-Growth (Young) Firms in the U.S.
November 2015
Working Paper Number:
CES-15-43
The pace of business dynamism and entrepreneurship in the U.S. has declined over recent decades. We show that the character of that decline changed around 2000. Since 2000 the decline in dynamism and entrepreneurship has been accompanied by a decline in high-growth young firms. Prior research has shown that the sustained contribution of business startups to job creation stems from a relatively small fraction of high-growth young firms. The presence of these high-growth young firms contributes to a highly (positively) skewed firm growth rate distribution. In 1999, a firm at the 90th percentile of the employment growth rate distribution grew about 31 percent faster than the median firm. Moreover, the 90-50 differential was 16 percent larger than the 50-10 differential reflecting the positive skewness of the employment growth rate distribution. We show that the shape of the firm employment growth distribution changes substantially in the post-2000 period. By 2007, the 90-50 differential was only 4 percent larger than the 50-10, and it continued to exhibit a trend decline through 2011. The reflects a sharp drop in the 90th percentile of the growth rate distribution accounted for by the declining share of young firms and the declining propensity for young firms to be high-growth firms.
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How Firms Respond to Business Cycles: The Role of Firm Age and Firm Size
June 2013
Working Paper Number:
CES-13-30
There remains considerable debate in the theoretical and empirical literature about the differences in the cyclical dynamics of firms by firm size. This paper contributes to the debate in two ways. First, the key distinction between firm size and firm age is introduced. The evidence presented in this paper shows that young businesses (that are typically small) exhibit very different cyclical dynamics than small/older businesses. The second contribution is to present evidence and explore explanations for the finding that young/small businesses were hit especially hard in the Great Recession. The collapse in housing prices accounts for a significant part of the large decline of young/small businesses in the Great Recession.
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REALLOCATION IN THE GREAT RECESSION: CLEANSING OR NOT?
August 2013
Working Paper Number:
CES-13-42
The high pace of output and input reallocation across producers is pervasive in the U.S. economy. Evidence shows this high pace of reallocation is closely linked to productivity. Resources are shifted away from low productivity producers towards high productivity producers. While these patterns hold on average, the extent to which the reallocation dynamics in recessions are 'cleansing' is an open question. That is, are recessions periods of increased reallocation that move resources away from lower productivity activities towards higher productivity uses? It could be recessions are times when the opportunity cost of time and resources are low implying recessions will be times of accelerated productivity enhancing reallocation. Prior research suggests the recession in the early 1980s is consistent with an accelerated pace of productivity enhancing reallocation. Alternative hypotheses highlight the potential distortions to reallocation dynamics in recessions. Such distortions might arise from many factors including, for example, distortions to credit markets. We find that in post-1980 recessions prior to the Great Recession, downturns are periods of accelerated reallocation that is even more productivity enhancing than in normal times. In the Great Recession, we find the intensity of reallocation fell rather than rose (due to the especially sharp decline in job creation) and the reallocation that did occur was less productivity enhancing than in prior recessions.
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High-Growth Firms in the United States: Key Trends and New Data Opportunities
March 2024
Working Paper Number:
CES-24-11
Using administrative data from the U.S. Census Bureau, we introduce a new public-use database that tracks activities across firm growth distributions over time and by firm and establishment characteristics. With these new data, we uncover several key trends on high-growth firms'critical engines of innovation and economic growth. First, the share of firms that are high-growth has steadily decreased over the past four decades, driven not only by falling firm entry rates but also languishing growth among existing firms. Second, this decline is particularly pronounced among young and small firms, while the share of high-growth firms has been relatively stable among large and old firms. Third, the decline in high-growth firms is found in all sectors, but the information sector has shown a modest rebound beginning in 2010. Fourth, there is significant variation in high-growth firm activity across states, with California, Texas, and Florida having high shares of high-growth firms. We highlight several areas for future research enabled by these new data.
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Innovation, Productivity Dispersion, and Productivity Growth
February 2018
Working Paper Number:
CES-18-08
We examine whether underlying industry innovation dynamics are an important driver of the large dispersion in productivity across firms within narrowly defined sectors. Our hypothesis is that periods of rapid innovation are accompanied by high rates of entry, significant experimentation and, in turn, a high degree of productivity dispersion. Following this experimentation phase, successful innovators and adopters grow while unsuccessful innovators contract and exit yielding productivity growth. We examine the dynamic relationship between entry, productivity dispersion, and productivity growth using a new comprehensive firm-level dataset for the U.S. We find a surge of entry within an industry yields an immediate increase in productivity dispersion and a lagged increase in productivity growth. These patterns are more pronounced for the High Tech sector where we expect there to be more innovative activities. These patterns change over time suggesting other forces are at work during the post-2000 slowdown in aggregate productivity.
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MEASURES OF JOB FLOW DYNAMICS IN THE U.S.*
January 1999
Working Paper Number:
CES-99-01
This paper uses the new Longitudinal Establishment and Enterprise Microdata (LEEM) at CES to investigate gross and net job flows for the U. S. economy. Much of the previous work on U.S. job flows has been based on analysis of the Longitudinal Research Database (LRD), which is limited to establishments in the manufacturing sector. The LEEM is the first high-quality, nationwide, comprehensive database for both manufacturing and non-manufacturing that is suitable for measuring annual job flows. We utilize the LEEM data to measure recent gross and net job flows for the entire U. S. economy. We then examine the relationships between firm size, establishment size, and establishment age, and investigate differences resulting from use of two alternative methods for classification of job flows by size of firm and establishment. Cell-based regression analysis is used to help distinguish among the effects of age, firm size, and establishment size on gross and net job flows in existing establishments. We find that gross job flow rates decline with age, and with increasing establishment size when controlling for age differences, whether initial size or mean size classification is utilized. Firm size differences contribute little or nothing additional when establishment size and age are controlled for. However, the relationship of net job growth to business size is very sensitive to the size classification method, even when data and all other methodology are identical. When mean size classification is used, the coefficient on establishment size for net job growth is generally positive, but when initial size is used, this coefficient is negative. These results shed light on some of the apparently conflicting findings in the literature on the relationship between net growth and the size of businesses.
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Mom-and-Pop Meet Big-Box: Complements or Substitutes?
September 2009
Working Paper Number:
CES-09-34
In part due to the popular perception that Big-Boxes displace smaller, often family owned (a.k.a. Mom-and-Pop) retail establishments, several empirical studies have examined the evidence on how Big-Boxes' impact local retail employment but no clear consensus has emerged. To help shed light on this debate, we exploit establishment-level data with detailed location information from a single metropolitan area to quantify the impact of Big-Box store entry and growth on nearby single unit and local chain stores. We incorporate a rich set of controls for local retail market conditions as well as whether or not the Big-Boxes are in the same sector as the smaller stores. We find a substantial negative impact of Big-Box entry and growth on the employment growth at both single unit and especially smaller chain stores ' but only when the Big-Box activity is both in the immediate area and in the same detailed industry.
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Volatility and Dispersion in Business Growth Rates: Publicly Traded Versus Privately Held Firms
July 2006
Working Paper Number:
CES-06-17
We study the variability of business growth rates in the U.S. private sector from 1976 onwards. To carry out our study, we exploit the recently developed Longitudinal Business Database (LBD), which contains annual observations on employment and payroll for all U.S. businesses. Our central finding is a large secular decline in the cross sectional dispersion of firm growth rates and in the average magnitude of firm level volatility. Measured the same way as in other recent research, the employment-weighted mean volatility of firm growth rates has declined by more than 40% since 1982. This result stands in sharp contrast to previous findings of rising volatility for publicly traded firms in COMPUSTAT data. We confirm the rise in volatility among publicly traded firms using the LBD, but we show that its impact is overwhelmed by declining volatility among privately held firms. This pattern holds in every major industry group. Employment shifts toward older businesses account for 27 percent or more of the volatility decline among privately held firms. Simple cohort effects that capture higher volatility among more recently listed firms account for most of the volatility rise among publicly traded firms.
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