Does a Rising Tide of Small Business Jobs Lift All Boats?

by John M. Fitzgerald and David C. Ribar

2001. [85} pages. Burke, Virginia 22015,

under contract no. SBAHQ-00-M-0574

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Purpose

Employment growth was strong during the 1990s;

the U.S. economy added 9.4 million jobs between

1992 and 1996 alone. But questions persist about

how different skill-level segments of the work force

benefit from a buoyant economy. This study uses

household and business data series to assess how

changes in the size-distribution of establishment and

job flows affected the employment opportunities and

earnings level of workers in different age, education,

and gender strata.

Overall Findings

Matching population information to a microdatabase

of firms confirmed some previous findings on job

turnover. Small firm employment is more susceptible

to business cycles fluctuations than large firm

employment is, and small firms have a higher rate of

business turnover. Also as expected, business births

and employment expansion had positive employment

effects for sectors of the work force that often struggle economically.

Overall, the study illustrated the difficulties in

obtaining significant results from matching fairly

unrelated data sources. The researchers also conducted evaluations at the business location level, but the

results cannot be generalized for small businesses,

since individual business locations categorized as

“small” are often auxiliary locations of large firms.

Highlights

The empirical results that the researchers obtained in

this study largely corroborate those presented in the

vast literature on employer-size earnings differentials

and job flows.

• The researchers found that the recession at the

beginning of the decade had more pronounced, negative effects on the employment change of small businesses, but their employment increases during the

recovery were generally higher than larger businesses’. And job reallocation rates—employment

changes associated with establishment openings and

closures—were found to decline with firm employment size. Net employment flows in manufacturing

were negative between 1990 to 1992 and modestly

positive in most subsequent years. By contrast, the

service sector added jobs in each year within the

scope of this study and the retail sector added jobs in

all but one year. However, employment in these latter

two sectors was more volatile over time than

employment in the manufacturing sector.

• The paper presents several time (annual) plots of

average real hourly and weekly earnings by firm

employment size (as self-reported by individuals in

the Current Population Survey data) for each of the

age, education, and gender strata of worker. Not surprisingly, the plots generally reveal that, regardless

of year and worker strata, workers’ hourly and weekly earnings tended to rise with firm size, although the

firm-size earnings differentials were less pronounced

among young, less educated, “low-skill” workers.
Also, there was a tendency for weekly and hourly

earnings to dip to varying degrees in the early to

mid-1990s. The results are not surprising, since larger firms are thought to pay a premium to hire soughtafter workers.

Another set of probit regression equations of individuals’ propensity to be employed in any given year

(between 1991 and 1997) was estimated using

matched data from the CPS and the Business

Information Tracking Series (BITS), with job flow

measures uniquely available from the BITS as

regressors. Among other things, the statistically significant estimates from these equations indicate that,

other things being equal:

• Job growth from establishment births in a county

had a positive effect on the propensity for young

men with lower education levels and older women

with lower education levels to be employed.

• Job growth from county-level establishment

employment expansions had a positive effect on the

propensity for older men with less education and

younger women with less education to be employed.

Scope and Methodology

Data used to support the empirical analyses presented in this study include the BITS and County

Business Patterns (CBP)—two business data series

produced by the U.S. Bureau of the Census, and in

the case of BITS, funded by and jointly developed

by the SBA’s Office of Advocacy. Both BITS and

CBP use the business location as a unit of analysis,

however BITS has linkages among locations that

comprise an entire firm allowing firm size analysis.

CBP, on the other hand, contains no information as

to the size of firm for establishments.

The study also draws upon the Census Bureau’s

household-based March Income Supplements of the

Current Population Survey over the 1990–1998 time

period to obtain information on individual characteristics of workers and potential workers. Apart from

the central working hypothesis the researchers set

out to evaluate, the study was also intended to further demonstrate the analytical capabilities of the

BITS, especially when it is augmented with data

from other sources.

Much of the study is comprised of descriptive

trend analyses using all three data series in a wide

variety of ways. The descriptive part of the study

relies heavily upon time plots for exposition purposes. The balance of the study is devoted to several

multivariate regression analyses using ordinary least

square (OLS) and probit techniques for various

worker categories.

Ordering Information

The complete report is available online at

www.sba.gov/advo/research. Copies are also available from:

National Technical Information Service

U.S. Department of Commerce

5285 Port Royal Road

Springfield, VA 22161

(703) 487-4650, (703) 487-4639 (TDD)

www.ntis.gov

Order number: PB2001-107831

Price codes: TBA