Job Creation by Small and Large Firms over the Business Cycle

By Tasci, Murat; Burgen, Emily | Economic Trends, February 2012 | Go to article overview

Job Creation by Small and Large Firms over the Business Cycle


Tasci, Murat, Burgen, Emily, Economic Trends


02.06.2012

The Great Recession caused establishments of all sizes to make significant cuts in their employment. To get a picture of those losses, we turn to the Business Employment Dynamics (BED) data collected by the Bureau of Labor Statistics (BLS), the best data to look at for employment gains and losses at the establishment level. BED data provides gross job gains and losses at the establishment level going back to the early 1990s and breaks down the data to several size categories. We aggregate those categories into three classes to simplify our analysis: small firms (1-49 employees), medium size firms (50-499), and large firms (500 and more employees).

Between the first quarter of 2008 and the second quarter of 2009, firms in every size class destroyed more jobs than they created, implying negative rates of job creation throughout the recession. Small firms, on net, cut their workforces by 485,000 per quarter on average. Medium size firms cut theirs by 329,000, and large firms cut theirs by 538,000. These net job losses contrast sharply with the average quarterly net gains in the years leading up to the recession (2003:Q2 to 2007:Q4): small firms added 124,000 new jobs over this period, medium size firms added 118,000, and large establishments added 145,000. The subsequent negative trend in net job creation did not stop until further into the recovery. It was not until mid-2010 that firms of all size classes started to report positive quarterly net job creation figures.

Net job creation did vary somewhat across establishments of different size over time, but the divergence was never significant. What is more striking is that the net job creation levels of all three sizes of establishment moved together over the business cycle, especially during the recessions.

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It would be useful to know whether a specific size class leads the employment loss during the recession or the overall job gains during the recoveries, but it is not possible to determine this from the chart above. Looking at the underlying gross job gains and losses separately for different size firms sheds more light on the question.

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Looking at gross job gains from 1994 to 2011 reveals that in any given quarter, U.S. establishments generated millions of jobs. Even during the worst-performing period--the Great Recession--establishments created around 5.3 million jobs per quarter. This is significantly less than the average of 6.3 million jobs per quarter over the entire period. Nevertheless, it clearly shows the underlying dynamism in the U.S. labor market.

Another feature we observe in the data is that small firms account for more than half of the gross job gains in every period. Medium-size and large establishments each contribute about a quarter of total gains.

Finally, it is clear that all establishments experienced significant declines in gross job gains over the course of the last recession. Large establishments cut the most, reducing gross job gains by about 43 percent from their pre-recession peak to their recession trough. The relative decline was almost 30 percent for medium-size firms and only 17 percent for small firms. The rebound in gross job gains after the recession seems to also differ by establishment size: Large firms recovered much faster than the others.

On the flip side, we observe that small firms also account for slightly more than half of the aggregate job losses at the establishment level over time--about 3. …

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Job Creation by Small and Large Firms over the Business Cycle
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