Academic journal article The European Journal of Comparative Economics

The Role of Firm Size and Firm Age in Employment Growth: Evidence for Slovenia, 1996-2013

Academic journal article The European Journal of Comparative Economics

The Role of Firm Size and Firm Age in Employment Growth: Evidence for Slovenia, 1996-2013

Article excerpt

1. Introduction

Whether small businesses create more jobs than the larger ones is a subject of much debate. A well-known hypothesis on firm growth, the so-called Gibrat's law, is that growth rates of firms are independent of their size (see Sutton, 1997). However, findings of Birch (1981) and a large number of subsequent studies have led to the conventional wisdom that net employment growth is negatively related to firm size.

Davis et al. (1996) argue that relating firm-size and net job growth is prone to bias because of regression-to-the mean effects. Transitory shocks to employment or random measurement errors could result in firms being categorized smaller or larger than their "typical" size. If these transitory shocks or random measurement errors were not highly serially correlated, this would lead to upward bias in the estimated growth rate of small firms and downward bias in the estimated growth rate of large firms. To mitigate the effects of regression to the mean, Davis et al. (1996) propose using a classification based on the average size, measured as the simple average of firm size in base year t-1 and current year t. (4) Based on the average size class method, Davis et al. find no systematic relationship between manufacturing plant size and employment growth in the United States.

Neumark et al. (2011) point out that the finding of Davis et al. (1996) does not hold in all cases. They cite studies on Canada, Greece, Netherlands, Sweden and the United Kingdom based on the average size class method that find greater net job growth in small businesses. In addition, in their own study on the United States for the period 1992-2004, based on the average size class method and nonparametric regression technique, Neumark et al. find that net job growth is greater in small firms and establishments.

Haltiwanger et al. (2010, 2013) argue that researchers may be confusing firm-size effects with the effects of firm age. New firms are an important source of net job growth and are typically small when they start operations. Thus, in the absence of controls for firm age (which is typical in much of the job flows literature), the finding of a negative relationship between firm size and net growth rates could be attributable to most new firms being classified in the small size classes. When controls are included for firm age and the average size classification is used, Haltiwanger et al. find a positive relationship between net growth and firm size. A similar result is obtained for Austria by Huber et al. (2012), for Canada by Dixon and Rollin (2012), for Hungary by Earle and Telegdy (2011), and for Ireland by Lawless (2014).

The findings on the relationship between net employment growth and firm age, with controls included for firm size, are less clear cut. Earle and Telegdy (2011) for Hungary, Haltiwanger et al. (2010, 2013) for the United States and Lawless (2014) for Ireland find that young firms grow more rapidly than the more mature firms but that the relationship is relatively flat after the age of 5 years. However, this finding is not supported by evidence from Austria and Canada. Huber et al. (2012) for Austria find that the average marginal impact on net job creation is greater for older firms than for young firms. For Canada, Dixon and Rollin (2012) find that employment growth declines sharply between one-year old and two-year old firms but that after the second year there is a positive relationship between firm age and employment growth.

A related issue is whether the cyclical dynamics of employment growth are different for firms of different size and age. Moscarini and Postel-Vinay (2012) find that in the United States, Denmark and France, large firms have higher net employment growth than small firms when unemployment is below trend, and lower net employment growth when unemployment is above trend. However, Fort et al. (2013) document cyclical dynamics across firms by both firm size and firm age and obtain a different pattern. …

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