ABSTRACT. Small firms are often seen to be the engines of
growth. There are two main sources of empirical evidence that
are adduced to support this conclusion. The first is that job
creation has been coming mainly from small firms. The second
is that the share of employment accounted for by small firms
has increased in the past two decades. Both of these sources
rely on a simple metric-employment. This paper asks whether
changes in this metric affect the view of the role that small
firms play in the growth process.
The first section of the paper maintains employment as the
measure that is used to evaluate the importance of small firms
but modifies the raw measure of employment to correct for
the fact that small firms pay lower wages than large firms.
When this is done, small producers are no longer found to
outperform large producers in terms of job creation over the
1970s and 1980s in the Canadian manufacturing sector.
The second section of the paper changes the metric used
to evaluate relative performance by moving from employment
to output and labour productivity. The paper demonstrates that
while small producers have increased their employment share
dramatically, they have barely changed their output share.
Small firms have been falling behind large firms both with
respect to wages paid and labour productivity.
The difference between small and large producers
in the intensity of job-creation is at the heart of
the debate over the necessity of directing indus-
trial policy toward the small-firm sector. To some,
this means devising special policies that will help
to overcome barriers that impose disadvantages on
small producers – such as special financing strate-
gies. To others, it means lobbying governments
to ensure that payroll taxes are not biased against
The job-creation process has been the focus of
most of the debate over the importance of small
firms. Small firms, it has been claimed, have been
creating more new jobs than large firms and have,
therefore, been the engines of growth.
Several caveats have been raised about the
meaning that should be attached to the job-
creation evidence. For a long time, the accuracy
of the data bases that were being used to measure
job-change in the United States was questioned.
More recently, Davis, Haltiwanger and Schuh
(1993) have argued that many of the studies have
a statistical problem of failing to correct for
regression-to-the-mean and that this problem
biases most analyses of job growth in favour of
Others have raised more serious questions
about the quality of the jobs that are created by
small firms. Brown, Hamilton and Medoff (1990)
have noted that wages are generally less in small
firms than large firms and that the jobs being
created in small and large firms are, therefore, not
comparable. Essentially, this debate is about the
appropriate metric that should be used to investi-
gate the relative importance of small as opposed
to large firms.
Previous Canadian work on the manufacturing
sector has carefully examined the extent to which
measurement technique that corrects for regres-
sion-to-the-mean affects the conclusion that small
producers create more jobs than large producers
(Baldwin and Picot, 1995).
In the previous study,
the job generating capacity of small and large
producers was compared. Job generation was
studied by calculating the job growth in plants and
producers where employment was growing; job
Were Small Producers the Engines
of Growth in the Canadian
Manufacturing Sector in the 1980s?
John R. Baldwin
Small Business Economics 10: 349–364, 1998.
1998 Kluwer Academic Publishers. Printed in the Netherlands.
Final version accepted on December 2, 1996
Micro-Economics Analysis Division, Statistics Canada
Canadian Institute for Advanced Research,
Economic Growth Group