Have Small Firms Created a Disproportionate Share of New Jobs in Canada?: A Reassessment of the Facts

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 small firm sector may have been overestimated, relative to that in large firms. This paper addresses various measurement issues raised in the recent research and uses a very unique Canadian longitudinal data set that encompasses all companies in the Canadian economy to reassess the issue of job creation by firm size. We conclude that over the 1978-92 period, for both the entire Canadian economy and the manufacturing sector, the growth rate of (net) employment decreases monotonically as the size of firm increases, no matter which method of sizing firms is used. The small firm sector has accounted for a disproportionate share of both gross job gains and job losses and, in that aggregate, accounted for a disproportionate share of the employment increase over the period. Measurement does matter, however, as the magnitude of the difference in the growth rates of small and large firms is very sensitive to the measurement approaches used. The paper also produces results for various industrial sectors, asks whether the more rapid growth in industries with a high proportion of small firms is responsible for the findings at the all-economy level, and examines employment growth in 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.

JEL Classification: J23, E24