Do small businesses create more jobs? New evidence
Gerrit de Wit
Jan de Kok
Accepted: 23 March 2013 / Published online: 28 April 2013
Ó Springer Science+Business Media New York 2013
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 classi-
ﬁcation, we analyze jobcreation 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.
Keywords Employment growth by size class Á
Employment creation Á Firm employment decisions
JEL Classiﬁcations E24 Á M51 Á L25 Á L26
Since the seminal studies conducted by Birch (1979,
1981, 1987), it has been a recurring question in the
discipline of Small Business Economics as to what
extent small businesses contribute towards job crea-
tion. This paper contributes to this topic in two ways.
First, we provide new arguments as to why the rarely
used method of dynamic classiﬁcation should be
preferred for determining the contribution of small
businesses towards net employment creation. Second,
we provide new evidence on the subject for the 27
Member States of the European Union.
How does this paper ﬁt in relation to the relevant
The central message of Birch’s work back
in the 1980s was that small businesses are the
most important source of net job creation in the
United States of America and, as such, his work
was quite inﬂuential in policy circles (Neumark et al.
2011, p. 16).
Subsequently, in the 1990s, a debate started on
methodological issues. Notably, Davis et al. (1996)
stated that researchers should address at least three
statistical pitfalls, viz. (1) the size distribution fallacy,
(2) the confusion between net and gross job creation,
and (3) the regression to the mean bias. They
concluded that—when all these statistical pitfalls
G. de Wit Á J. de Kok (&)
Panteia/EIM, P.O. Box 7001, 2701 AA Zoetermeer,
See Neumark et al. (2011) for a more comprehensive
overview of the relevant literature. The current section is
partially based on their overview.
Small Bus Econ (2014) 42:283–295