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Wednesday, February 26, 2014 9:43 PM

Job Creation and Destruction: Do Small, Medium, or Large Corporations Account for Job Growth?

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The hunt for jobs is on. But where is the job growth? Is job growth in small, medium, or large corporations?

Unfortunately, that question is insufficient to answer the question. One must also factor in job destruction and the closing of businesses.

With that in mind, please consider the Wall Street Journal report: Say It Together: Young Businesses, Not Small Ones, Drive Job Growth

It’s not size that matters — at least when it comes to job creation. The age of the company is a bigger factor.

The Federal Reserve Bank of Chicago’s Jason Faberman on Monday became the latest in a long line of economists to unpack the misconception – promoted frequently by elected officials — that small businesses are the key to creating new jobs in the U.S.

It’s a subset of small firms—young, innovative companies—that lead in job creation. “It’s the new guys, not necessarily the small guys, that generate growth,” he said at the National Association for Business Economics policy conference in Arlington, Va. “The focus for policymakers shouldn’t be on small business job growth, but on new business formation.”

Nearly 90% of U.S. firms employ 19 or fewer workers. Those smaller firms create jobs at nearly twice the rate of larger companies. Controlling for the age of the firm, Mr. Faberman found the strongest job growth came from firms that were less than four years old.
Small or Large vs. New

The above article says job growth is not small vs. large, but rather old vs. new.

But what about job destruction?

Job Creation and Destruction by Firm Age and Size

To help answer the question, please consider the following interactive map from Tableau  Software.

Tableau Chart of Job Creation vs. Destruction

The above Tableau interactive map is from The Pattern of Job Creation and Destruction by Firm Age and Size by the Federal Reserve Bank of Atlanta.

Here is a snip.
Colors represent age categories, and the sizes of the dot represent size categories. So, for example, the biggest blue dot in the far northeast quadrant shows the average rate of job creation and destruction for firms that are very young and very large. The tiny blue dot in the far east region of the chart represents the average rate of job creation and destruction for firms that are very young and very small. If an age-size dot is above the 45-degree line, then average net job creation of that firm size-age combination is positive—that is, more jobs are created than destroyed at those firms. (Note that the chart excludes firms less than one year old because, by definition in the data, they can have only job creation.)

The chart shows two things. First, the rate of job creation and destruction tends to decline with firm age. Younger firms of all sizes tend to have higher job-creation (and job-destruction) rates than their older counterparts. That is, the blue dots tend to lie above the green dots, and the green dots tend to be above the orange dots.

The second feature is that the rate of job creation at larger firms of all ages tends to exceed the rate of job destruction, whereas small firms tend to destroy more jobs than they create, on net. That is, the larger dots tend to lie above the 45-degree line, but the smaller dots are below the 45-degree line.

Apart from new firms, it seems that the combination of youth (between one and ten years old) and size (more than 250 employees) has tended to yield the highest rate of net job creation.
Appearances vs. Reality

It's not small vs. large but rather old vs. new in conjunction with small vs. large.

But what about the influence of regulations, of unions, of Fed policies, of local taxes, federal taxes, and currency manipulations everywhere one looks?

Since regulations and tax laws overwhelmingly favor large corporations over small corporations (thanks to huge campaign contributions from the former vs. latter), I ask a simple question: Are the Wall Street Journal and Fed reports totally worthless?

Mike "Mish" Shedlock

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