Firms v. Establishments: Who’s creating the jobs?

July 19, 2012 at 3:26 pm

In a previous blog post, we mentioned Jared Bernstein‘s research on the claim of small businesses as job creators. He had stated that their role in job creation is overstated, but that doesn’t mean that public policy should not focus on supports for small businesses. In the Huffington Post today, he digs into this a bit deeper.

Bernstein looks into the difference between firms and establishments. An establishment is a business, usually at one location, that is a single economic unit. A firm, however, is a business that may be comprised of several establishments. The example he uses is the GAP– while a single retail store might have 40 or so employees,  making it a “small” establishment, GAP as a company is very large and in total has hundreds of employees.

This is an important distinction because claims of small businesses creating a large share of the jobs is based on establishments. It means that when the job creation numbers include firms like the GAP–because each of GAP’s retail stores is a small establishment– it doesn’t truly reflect how many jobs small establishments– stand-alone, small businesses– are creating. The chart below shows how the job creation numbers look when comparing establishments (from the ADP jobs data) and firms (from the Bureau of Labor Statistics).

The question is, how should this impact public policy? Bernstein is not using these numbers to argue that small businesses don’t need help. Instead he argues that despite the job creation claims, small firms face barriers that large firms don’t– and those barriers should be addressed.

Public policy should help them overcome these barriers…. It’s far less important than the small-biz centric discussion suggests. Small startups that survive and grow have been found to be key contributors to job growth (see second link above), but beyond that, many small firms grow, many large ones shrink (regression to the mean) and at the end of the day, we want to see robust creation of good jobs, regardless of size class.

In addition, it’s important to remember that context matters, and that the aggregate numbers don’t tell the whole story. Small businesses bring value to local economies beyond the measure of job creation. They are a means of creating local wealth and, yes, local jobs in many communities, particularly those that are underserved and economically struggling. Having a healthy mix of small, medium-sized, and large firms is key to building robust local economies. Public policy can and should play a role in ensuring that all businesses, big and small, have an opportunity to grow and thrive.

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Entry filed under: Economic Development, Small Business. Tags: , .

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