Do small businesses create more jobs? New evidence for Europe

Abstract

In this paper, we argue why, in our view, the so-called dynamic classification method should be favored when determining the contribution of small businesses towards job creation. First, it is the only method that consistently attributes job creation or loss to the size class in which it actually occurs. In addition, dynamic classification has two other advantages: (1) it is not vulnerable to the so-called regression to the mean bias, and (2) only a small number of aggregated data are required for its application. Using the dynamic classification, we analyze job creation within the different size classes for the 27 Member States of the European Union. Our main findings are as follows. For the EU as a whole, smaller firms contribute on a larger scale towards job creation than do larger firms. Net job creation rates decrease with each firm size class. This pattern occurs in most industries, however, not in all; the manufacturing industry and trade industry show different patterns. At the level of individual countries, the net job creation rate also tends to decrease with each firm size class. However, this relationship is not perfect.

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Notes

  1. 1.

    See Neumark et al. (2011) for a more comprehensive overview of the relevant literature. The current section is partially based on their overview.

  2. 2.

    In this paper, we follow existing research by dividing firms into different size classes to investigate the relationship between net job creation and firm size. However, the act of dividing firms into different size classes might introduce potential biases. Neumark et al. (2011, pp. 26–27) addressed this point by alternatively investigating the relationship between net job creation and firm size without the introduction of size classes. This robustness test does not alter their results. Although we are not able to do such a robustness test ourselves in this paper due to the lack of data, we are therefore confident that such potential biases are small.

  3. 3.

    See, however, Section 3 where it is shown that dynamic classification can also be applied without longitudinal data at firm level.

  4. 4.

    Davis et al. (1996) additionally introduced yet another method in which firms are classified on the basis of their long run average size. They call this method classification by average size. For reasons given by Carree and Klomp (1996, pp. 318–319), we do not discuss this method here.

  5. 5.

    If you have quarterly data, you have a further choice between classification by annual base size and quarterly base size. See Butani et al. (2006).

  6. 6.

    We follow Neumark et al. (2011) in this. Davis et al. (1996) refer to it as classification by current size¸ and Okolie (2004) and Butani et al. (2006) refer to it as classification by mean size.

  7. 7.

    Butani et al. (2006, p. 6) remarked that the method is also referred to as classification by momentary size.

  8. 8.

    More specifically, do the quarterly net employment growth statistics by size class add up across quarters to the same net employment growth statistics by size class that would be computed from a longer measurement frequency such as an annual change?

  9. 9.

    We already noted this in our unpublished working paper, De Kok et al. (2006).

  10. 10.

    See Section 3.2 for the exact data requirements for the general case.

  11. 11.

    The number of net crossings of a boundary is equal to the change in the number of firms above this boundary.

  12. 12.

    For more elaborations on the subject, see De Kok et al. (2006, pp. 27–28, 47–50).

  13. 13.

    We define size classes on a continuous scale in this paper, viz. (0,10), (10,50), (50,250), (250 or more). Other papers, e.g. Butani et al. (2006), defined size classes on a discrete scale, which would read as follows for our size classes: “1–9”, “10–49”, “50–249”, “250+”. We prefer the continuous definition for two reasons: (1) it is more general because in this way you can also handle data with employment measured in full-time equivalents (that need not be in integer values); and (2) when using classification by average size or dynamic classification, it is then clear from the mere definition of the size classes how you treat e.g. an average firm size of 9.5 (when classifying by average size) or how you divide the firm’s employment increase between size-classes when a firm grows from e.g. 8 to 12 (when using dynamic classification).

  14. 14.

    The Small Business Act was adopted in June 2008. It aims to improve the overall approach to entrepreneurship, permanently anchor the ‘Think Small First' principle in policy making from regulation to public service, and to promote SMEs' growth.

  15. 15.

    We have not found any documentation on the type, nature or number of imputations that have been made. We therefore cannot exclude the possibility that the imputations result in a bias in the outcomes of our analysis.

  16. 16.

    The enterprise is defined as the smallest combination of legal units that is an organizational unit producing goods or services, which benefits from a certain degree of autonomy in decision-making, especially for the allocation of its current resources. An enterprise can contain one or several establishments. The enterprise size classes are based on a headcount of the number of occupied persons (the sum of the number of employees and the number of unpaid people employed).

  17. 17.

    For this study, we use NACE rev. 1.1.

  18. 18.

    http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performance-review/index_en.htm#h2-2; accessed July 9, 2012.

  19. 19.

    A third file is available on the website (database for the Annual Report 2008) but this does not include any additional data and was updated later (by the database for the Annual Report 2009).

  20. 20.

    Neumark et al. (2011) presented results for two different methods: classification by base year size and by average size. We take their results from the latter method as a reference, because classification by average size gives results comparable with results from dynamic classification, the method employed in this paper (see Section 2.2 of this paper).

  21. 21.

    Neumark et al. (2011) included the financial industry, covered a longer period of time, and distinguished 12 different size classes.

  22. 22.

    Neumark et al. (2011) did not present an average net job creation rate across all size classes. We have therefore computed the ratio between the average net job creation for all size classes and the average employment across all size classes, based on the statistics presented in panel II of Table 1.

  23. 23.

    For each country, we have calculated the Pearson rank-order correlation between the (rank of the) net job creation rates for the four different size classes and the ranking of the size classes (where the ranking increases with average firm size).

  24. 24.

    Only the Czech Republic and Poland do not meet either one of these conditions.

  25. 25.

    For example, in this paper, micro-businesses are defined as businesses with 0–10 employees. They create on average over a million jobs a year in the European Union (see Table 3). Theoretically (although we have no reason to believe this is probable), it could be possible that most of these jobs are created by firms with size 8–10 employees. If this would be the case, defining micro-businesses as businesses with 0–8 employees would generate quite different results.

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Acknowledgments

We are appreciative to two anonymous experts for their constructive suggestions towards the improvement of this paper. The research has been supported by the framework of the research program SCALES carried out by Panteia/EIM and financed by the Dutch Ministry of Economic Affairs.

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de Wit, G., de Kok, J. Do small businesses create more jobs? New evidence for Europe. Small Bus Econ 42, 283–295 (2014). https://doi.org/10.1007/s11187-013-9480-1

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Keywords

  • Employment growth by size class
  • Employment creation
  • Firm employment decisions

JEL Classifications

  • E24
  • M51
  • L25
  • L26