**Employment Growth at the Firm Level: The Boom Years (2002-2008)**<sup>**8**</sup>

**Most countries in the EU11 region enjoyed both positive economic and employment growth in the pre-2008 crisis period** .<sup>9</sup> The “boom” years in EU11 were characterized by the transformation of domestic productive structures, accompanied by deepening of international trade and financial development.<sup>10</sup> To a large extent, economic growth did translate into job creation in EU11 at the macroeconomic level.<sup>11</sup>

**At the firm level, traditional industries were the key creators of new jobs prior to the crisis** . Employment growth was greatest in the construction and manufacturing industries and lowest in the service industries among the surveyed firms. When controlling for differences in firm-characteristics, employment growth was lowest in the group of other industries, which mainly consisted of services firms.<sup>12</sup> Across different specifications of the firm growth model, an average construction firm was estimated to grow by 3.8 (column 1 of Table 1) to 6.1 (column 6) percentage points more annually in comparison to a firm of the same size, age, and productivity in the “other sector.” The comparable numbers for manufacturing firms varied between 3.2 and 4.1 percentage points. In half of specifications, agricultural and fishing firms were estimated to grow by approximately 3 percentage points faster than other service firms.

**In contrast, while firms operating in the service sector were important in terms of overall value added, they did not contribute much to job creation** .<sup>13</sup> The number of firms that operate in the EU11 services sector was very large (around 72 percent of all sampled firms were service providers), but these firms were very small and not willing to grow in terms of employment. In more traditional sectors, the average firm size was larger and, therefore, they strongly contributed to overall job creation in 2002-2008. Controlling for differences in firm-specific productivity, service industries were estimated to create jobs at a slower pace than firms in the rest of the economy.

**The smallest surviving firms exhibited the highest rates of job creation prior to the crisis.** In line with typical estimation results from empirical firm growth equations á la _Gibrat's law_ (see, e.g., Coad 2009) _,_ the average employment growth rate was largest in the initially smallest firms. More precisely, the empirical results showed that a one percent increase in the initial firm size (i.e., the firm size at the first observed year) correlates with a decrease in average annual job creation rate of 5.3 to

> 8 The presented results here are based on the above described econometric model which allows to (at least) identify partial correlations between employment growth and the included covariates. This implies that the findings might not necessarily reflect a causal relationship, but are suggestive for the modeled relationships.

> 9 The link between economic and employment growth for the pre- and post-crisis period is explored in detail in World Bank (2013, forthcoming). One should note, however, that employment creation rates vary significantly across countries—even countries with similar growth experiences.

> 10 See Raiser and Gill (2012)

> 11 See World Bank (2013, forthcoming)

> 12 The reported industry effects from the regression analysis have to be interpreted relative to the omitted group of firms, which consists of service firms.

> 13 It is worth noting that this finding applies to strictly to the surveyed surviving firms. If entry and exit dynamics systematically differ between traditional industries and services providers, this result might be reversed. For this reason, it would be crucial to reexamine the job creation analysis using census data that allow for accounting for firm entry and exit. The data used in the analysis here do not allow for accounting for firm exit.

8