Mark Twain said that it ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.
For instance, everyone has known for a long time that job growth is all about small business — and many a politician has offered proposals and policies meant to pump up small firms.
But what if it’s wrong? Are we pouring fuel into the wrong economic engine?
Once, we assumed that big companies drove the economy.
A 1979 study by David Birch was the first to spin the compass around: He concluded that firms with 100 or fewer employees created 82 percent of net jobs.
In the years since, the conventional wisdom shifted. Presidents of both parties have echoed the small-biz sentiment.
Figuring out what’s true is not easy. First, there are definitions to quibble with: For instance, where’s the line between small and big?
Then there’s churn. The economy each month produces millions of jobs and kills just about as many. How long does a job have to last before you count it?
And how do you count a company that grows like gangbusters one year, then collapses the next? How about a company that starts out on in your “small” category, then grows, then shrinks back to its original size? Do you book the jobs created as small business, and the job losses as coming from a big firm?
“The math gets tricky when businesses change size classes as they add or lose jobs,” wrote Phil Davies in a publication of the Minneapolis Federal Reserve Bank.
Turns out that the Census Bureau has a database that offers a view of job growth, age and size, too, according to three economists in a recent paper for the National Bureau of Economic Research.
Trolling through 13 years of data, they conclude that net job growth doesn’t match up with size at all.
Lo and behold, big companies are a huge factor. Companies of more than 500 workers, which represent 45 percent of all private-sector jobs, account for 40 percent of both job creation and job destruction.
And while they conclude that small may be beautiful, youth counts for more: The kids club of companies less than a decade old — especially start-up companies — are a powerhouse.
“Start-ups account for only 3 percent of employment, but almost 20 percent of gross job creation,” the three write.
Of course, the mortality rate is high: Within five years, 40 percent of the jobs created by start-ups have been eliminated, they write. But the ones that survive grow faster than older companies.
Now, you say: Small, young — aren’t they the same thing? Well, most new companies are small, but not all. There are corporate spin-offs, for example, that start out large. More importantly, a lot of small firms do not grow fast or at all — the growth seems to come from the young ones.
So a policy aimed at all small businesses may not be useless, but it won’t hit the bulls-eye either. It will miss the larger start-ups and will prop up many small companies that might not have much of a future.
And while the policy might help vibrant start-ups, it could do better if it were tuned to their needs.
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