ABSTRACT. The statistical observation that small firms have
created the majority of new jobs during the 1980s has had a
tremendous influence on public policy. Governments have
looked to the small firm sector for employment growth, and
have promoted policies to augment this expansion. However,
recent research in the U.S. suggests that net job creation in the
manufacturing small firm sector may have been overestimated,
relative to that in large firms.
The first part of this paper addresses various measurement
issues raised in the recent research, reassess the issue of job
creation by firm size, and pushes this work beyond the
manufacturing sector by employing longitudinal data covering
all companies in the canadian economy. We conclude that over
the 1978–92 period, as a group small firms did account for a
disproportionate share of both gross job gains and losses, and
net employment increases, no matter which method of sizing
firms is used. Measurement does matter, however, as the
magnitude of the difference in the growth rates between small
and large firms is very sensitive to the measurement
approaches used. Part one of the paper also produces results
for various industrial sectors, and examines employment
existing small and large firms (i.e., excluding births).
It is found that employment growth in the population of
existing small and large firms is very similar. Attempts are
made to introduce a job quality aspect to the analysis by using
payroll rather than employment data. Payroll data allow any
relative change in hours worked or wages paid in small
(relative to large) companies to be incorporated in the findings.
This did not significantly alter the conclusions reached using
employment data only.
The second part of the paper looks at concentration and
persistence of employment creation and destruction within size
classes. If growth is highly concentrated, knowing that a firm
is small will provide little information about its prospects for
growth. Most small firms would grow relatively little, or
decline, while a few expanded a lot. It is found that both job
creation and destruction is highly concentrated among rela-
tively few firms in all size groups. There are fast growing
firms in all size classes, and although most job creation is
found in the small firm sector, the fastest growing large firms
out-perform the majority of small firms in any given period.
Finally, the employment creation performance of businesses
are compared over two three-year periods. It is found that
knowing that a firm is a high performer (in terms of jobs
created) over one period is of only limited value in deter-
mining growth in the second period. This is particularly true
among small firms. These results suggest that firms which
expand rapidly during one period are replaced to some
considerable degree by others in the subsequent period.
The statistical observation that small firms have
created the majority of new jobs during the 1980s
has had a tremendous impact on public policy.
Few other statistical facts could claim such influ-
ence. With persistently high unemployment during
the 1980s and early 1990s, governments seeking
employment growth have turned to the sector that
was apparently the generator of most jobs.
This has resulted in a public policy orientation
that has very actively promoted the development
and expansion of small firms through various
means, including differential tax treatment, the
provision of information support services, the
creation of sources of venture capital, and the
exclusion of small firms from various legislation,
such as the requirement in some provinces to
equalize fringe benefits for full-time and part-time
staff (Industry Canada, 1994). One major rationale
for this policy orientation has been the belief that
if the Canadian economy is to achieve a substan-
tial growth in employment, it will be among small
and medium sized firms.
The roots of this belief lie with work by the
American economist David Birch (1979, 1987), in
which he found that most of net new job creation
was among small firms. Other studies have also
concluded that in many countries small firms have
Job Creation by Company Size Class: The
Magnitude, Concentration and Persistence
of Job Gains and Losses in Canada
Small Business Economics 10: 117–139, 1998.
1998 Kluwer Academic Publishers. Printed in the Netherlands.
Final version accepted on April 16, 1996
Business and Labour Market, Analysis Division