U.S. Census Bureau

Abstract: There’s been a long, sometimes heated, debate on the role of firm size in employment growth. Despite skepticism in the academic community, the notion that growth is negatively related to firm size remains appealing to policymakers and small business advocates. Basically, they argue that small firms grow faster than larger firms and are more important as a source of job creation. In this paper, we provide a more nuanced perspective on this debate. Using data from the Census Bureau Business Dynamics Statistics and Longitudinal Business Database, we explore the many issues regarding the role of firm size and growth that have been at the core of this ongoing debate (such as the role of regression to the mean). We find that the relationship between firm size and employment growth is sensitive to these issues. However, our main finding is that once we control for firm age there is no systematic relationship between firm size and growth. Indeed, once we control for firm age, we find that firms with between 5 and 499 employees have lower net growth rates than the largest firms (10,000 or more workers) in the economy. Our findings highlight the important role of business startups and young businesses in U.S. job creation. Business startups contribute substantially to both gross and net job creation. In addition, we find an “up or out ” dynamic of young (and small businesses). These findings imply that it is critical to control for and understand the role of firm age in explaining U.S. job creation. * We thank the Kauffman Foundation for financial support. Any opinions and conclusions expressed herein are those of the author(s) and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure that no confidential information is disclosed. 1 1