Is Firm Size Important for Job Formation?

It is a very well known “fact”, more like an article of faith, that small firms account for the bulk of U.S. job formation. This belief has been highly instrumental in influencing economic policies towards business at all levels of government.

If my memory is accurate, it was David Birch of MIT who first called attention to the importance of small businesses as job generators some 35 years ago. Since then, there have been numerous studies using increasingly refined data and better defined concepts.

One of the most interesting contributions is the recent research paper by John Haltiwanger, Ron S. Jarmin, and Javier Miranda. They find that, indeed, small firms do a better job than large firms in creating jobs. However, once you “control for” age of firm, the advantage disappears. In plain English this means that start-ups and young small firms do the bulk of the job generating. Fertility diminishes as small firms grow older.

These findings do not negate the “conventional wisdom” about the importance of small businesses. Rather, they call for a refined approach in the design of economic policies. In order to create jobs, policy should be tailored to what stage firms are at. To encourage start-ups and net new jobs growth at young firms, we need to, e.g., streamline the permit process, cut regulatory red tape, and provide access to early stage funding. On the other hand, we also need to keep older small firms alive and well to preserve the large number of jobs they have. Here attention may have to be more on working capital, the burden of regulation, and the like.

Small businesses are very important to our economy. And it is important to understand just how they contribute to the economy and job creation.

The Fiscal Asteroid

Some people call it “Taxmageddon” and Ben Bernanke has been referring to it as “The Fiscal Cliff.” Personally, I like the image of an asteroid hurtling towards earth and threatening to hit at precisely the same moment that the ball finishes its descent in Times Square this coming New Year. What we’re all talking about is the simultaneous expiration of the Bush tax cuts, Obama pay­roll tax reductions, and extended unemployment benefits on December 31. Furthermore, January 1 marks the start of $120 billion of automatic federal spending reductions required by the failure of Congress to agree on specific deficit reduction measures last year.

I’ve seen estimates that these actions amount to 3 to 5 percent of GDP (Gross Domestic Product). If allowed to take effect, these measures are enough to cause a serious recession at a time when we’ve haven’t fully recovered from the one that ended in mid-2009.

Sure, our elected representatives in Washington are fully aware of this coming collision. But what will they do about it? Much depends on the outcome of the November elections and who has control of the Senate and the White House.

The odds are high that the asteroid won’t hit. However, even a “near miss” is apt to generate a lot of uncertainty later this year when – I almost forgot – the debt ceiling has to be increased yet again.