Only young businesses – predominantly small – create a disproportionate number of jobs OECD finds

The OECD has embarked on a distributed microdata project, called DynEmp, with the aim of providing a cross-country evidence base for the design of well-grounded policies for employment and growth. The project has produced a new database of micro-aggregated firm-level data on employment dynamics for different groups of firms classified by size, age and sectors across 18 countries and over a ten year period…

Preliminary evidence from the DynEmp database shows that great differences exist in the weight that small firms have in terms of employment levels and job creation. The disproportionate weight of small firms and the low presence of large businesses might reflect two very different phenomena: a significant presence of start-ups that are often very small – or a large share of more mature businesses that have not grown. More broadly, disaggregating the age profile of businesses within different size classes provides complementary insights to an analysis based solely on the size dimension when assessing the dynamism and the efficiency of resource allocation of an economy. The DynEmp data show significant cross-country differences in the age profile of small firms, with small firms being systematically older in some countries.

The relevance of the age profile of small businesses takes on particular importance when analysing the role of small businesses as net job creators. Results from the DynEmp database suggest that not all small businesses are net job creators, showing that only young businesses – predominantly small – create a disproportionate number of jobs, confirming recent evidence for the United States. When disentangling the role of entry from the role of expansion of incumbent young firms, the data clearly shows that entry explains most of the contribution to job creation, followed by start-ups (i.e., firms that are less than three year old). While this remains true even during the recent great recession, the data shows a sharp decline in the contribution of entry and young firms to aggregate employment growth during the recession. More generally, the findings point to a decline in start-up rates over the past decade across all countries considered, which gives cause for concern, given their strong contribution to job creation. Going beyond cross-country averages, the data shows great heterogeneity across countries in the extent to which young firms contribute to aggregate employment growth.

The disproportionate contribution of young firms to gross job creation, however, has to be considered in conjunction with the “up-or-out” dynamics typical of young firms, where high average rates of post- entry growth for incumbent young firms co-exist with low survival rates for firms in this age group. Differences in these dynamics likely reflect the extent to which young firms are willing to experiment and are able to shed jobs. This can vary significantly across countries and sectors and over time, depending on the nature of the activity of the firms, the uncertainty of demand and the business environment, and on features of the policy framework, such as regulatory barriers, employment protection legislation and bankruptcy legislation. The report presents evidence on the extent to which the dynamics of young firms differ from older businesses, and how these differences have changed over time and varied across countries and macro-sectors.

An efficient process of reallocation, where young firms can experiment and thrive if successful, is crucial to ensure employment as well as productivity growth. However, existing cross-country evidence suggests that sizeable differences exist in the extent to which younger firms are able to upscale and create jobs in different economies. The report provides direct evidence on the extent to which firms grow over a three-year horizon, while it provides indirect evidence on the potential size that young firms are likely to achieve as they mature. Again, there are large cross-country differences in the growth potential of young firms.

Finally, the report investigates how the financial crisis has affected jobs and firms in different countries and which firms, job flows (job creation vs. job destruction) and margins (entry/exit vs. up scaling/downsizing) of the employment growth dynamics have been hit hardest by the recession. The descriptive and regression analysis shows that the Great Recession has affected disproportionally more young firms, both in their job creation and job destruction rates. Notwithstanding this, the contribution to net employment growth of start-ups and young firms remains positive during the crisis, confirming their importance for job creation throughout the business cycle.

Chosen excerpts by Job Market Monitor. Read the whole story at The Dynamics Of Employment Growth: New Evidence From 18 Countries 

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