I’m not entirely sure what point Scott Shane is making here in rebuttal to an earlier post, but a) if he’s questioning the importance of surviving startups in net job creation, I disagree, and b) the key point is to better understand the poorly understood relationship between firm size and job creation.
The conventional wisdom that small firms are the engine of job creation isn’t supported by the data once you control for some key factors, especially firm age. And it is here that the role of startups becomes clear.
The best work on this comes from this paper by Haltiwanger, Jarmin, and Miranda (HJM). Here’s their key figure, which shows rates of net job growth across firm size, adding various controls.
Source: Haltiwanger, Jarmin, Miranda (2010); link above.
The line marked “Base Year Size” supports the conventional wisdom, showing high rates of net job growth for small firms and low rates for larger ones. But once the researchers control for two key factors—regression to the mean and firm age—that relationship flips (“Current (Avg) Size with Age Controls”).
“Regression to the mean” is about the gravitational pull of the mean value in statistics. In this context, the largest firms tend to be getting smaller and the smallest firms tend to grow. HJM control for that by averaging firm size over time.
Regarding firm age, the big story here is that startups—which can only grow at first but which also have high death rates—play an important role in these dynamics. They’re small at first, and many perish—about 40% of the startups’ jobs are lost through firm death after five years. But if they survive, they will generate significant job growth (HJM: “conditional on survival, young firms grow more rapidly than their more mature counterparts”).
This finding and the flip of the lines in the figure when the proper controls are applied have important policy implications. Once we account for the startup effects, small businesses, per se, are not the engines of job growth they claim to be.
As I noted here, they need and deserve help given their size, credit constraints, and lack of scale economies. But we’d be better off in terms of job growth if we listened less to their conservative lobbyists constant patter on tax cuts and deregulation, and thought more about clearing the way for startups.