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The Progressive Economics Forum

Small Businesses NOT Big Net Job Creators

Small business – or at least the CFIB – consistently claim to be the big job creators in the economy. This has never been borne out by the available data on net job growth by firm size. And Statscan has now added to our knowledge by releasing a new paper and new CANSIM data today.

The paper looks at the 2001 to 2009 period and finds that employment shares by firm size in the private sector were largely stable, with a slight tilt to net growth in small firms with less than 50 employees.   The share of both firms with less than 50 employees and firms with more than 500 employees grew modestly at the expense of medium sized firms over that period. (See CANSIM  527-006.)

It is interesting, however, to discover that larger firms led in more recent years.

As shown in the Table below (from CANSIM 527-0006) showing data for 2005-09, net employment growth of firms with more than 500 employees exceeded the overall private sector net growth rate every year, as did net employment growth of firms with 100 to less than 500 employees except in the recession year of 2009.

 

 

Employment flow rate Firm size 2005 2006 2007 2008 2009
Net employment growth Private sector 1.1 2.6 3.1 1.8 -3.2
Less than 5 employees -8.8 -6.0 -2.9 -4.2 -10.2
5 to less than 20 employees 0.7 2.2 3.6 2.2 -0.8
20 to less than 50 employees 2.1 3.9 4.5 3.3 -2.7
50 to less than 100 employees 2.3 4.6 4.0 2.9 -3.9
100 to less than 500 employees 3.1 4.5 3.9 2.3 -4.1
500 employees or more 2.4 3.2 3.5 2.3 -1.9

Enjoy and share:

Comments

Comment from Michael Boudreau
Time: June 27, 2012, 9:53 am

I’m not sure if you’ve ever seen this US paper by Haltiwanger where he seems to find more correlation with company age.
http://www.nber.org/papers/w16300

Comment from Paul Tulloch
Time: June 27, 2012, 1:02 pm

Just a technical note- I worked once in the Business Register at Statcan (couple years and had to design an algorithm to model the GST file to produce small business estimates. My conclusion- trying to keep track of small business registrations is quite an almost impossible challenge. So much change- out of business, owner operators, the margins and stratum jumpers that it is very very difficult to produce reliable counts of business at the small end, let alone employee counts.

My point- any statistics on small business one should take with a very large grain of salt and a couple of pain killers- (especially if you are a methodologist)

Large and medium entities, one at least knows they are there and alive and amazingly enough, most admin people in these companies actually have a rough idea of how many employees that have- and let me emphasize- rough!

So I cringe a bit when comparing employment levels that specifically focus on small business and large business. Kind of like comparing apples and oranges.

My point of job creation of small companies- (does anybody actually take the CFIB serious- I hope not) who can afford the R&D for innovation? Small or large companies. Again too different species, I was going to say fish, but single cell Amoeba are not fish, are they?

Small companies are essentially fatalistically parasitic are they not- they feed on original value creation somewhere else- attached to the giants of capital – it is a good story though, kind of like where the small guy always finishes first and is the hero- of course the CFIB is going to tell such stories. I wish though they would start thinking more along the lines of Dickens.

Comment from Purple Library Guy
Time: June 27, 2012, 7:51 pm

Thinking of methodology, I have a question–if a company grows or shrinks past the boundary levels, how does that get counted?
Like, say a company had 40 employees, but expanded to 60 employees. When it reports that it created jobs, it is a company with 60 employees that created 20 jobs. But, when it undertook to create the jobs, it was a company with 40 employees . . . depending how you count that kind of thing, you could have a different story about job creation in small companies, although in the bigger brackets I’d assume the effect tails off as there are fewer brackets.

I’m perfectly willing to believe that job creation isn’t particularly related to firm size. But Mr. Tulloch, that last point seems a bit exaggerated . . . depending on how you define this “parasitic” nature of “feeding on original value creation somewhere else” it would apply to every firm of any size in the entire world, since no firm can do anything without inputs. On the other hand, if there are firms to which it doesn’t apply, then I know plenty of small businesses to which it doesn’t apply, e.g. bakeries who bake their own goods, the leather craftsman making my backpack, the dance companies my stepdaughter is involved in . . . these people create plenty of original value, they aren’t reselling goods made elsewhere.

Comment from Paul Tulloch
Time: June 28, 2012, 5:26 am

Plg- you are interpreting my statement wrong, in fact a bakery is a perfect example. Yes I am exaggerating it a bit, but small business could not survive without latching onto wealth creating abilities of larger entities and it has very little to do with inputs. A major component of economic Surplus is generated in our economic system by the productivity advances, and a majority of those are driven by R&D, and innovation in the large. Theoretically I suppose you could break up the large entities into smaller, but that is not empirical of where wevare at.

It is true that smaller companies can be more flexibll innovative and there is a small ecosystem of these firms utbthey are hardly the norm of small business in Canada. About the only thing flexible about most small business is its ability to layoff workers when needed as they are typically non-union. Sorry but small business has not evolved much over time, they are the first under the radar when it comes to regulations. Potentially just due to the size.

Regarding your methods question, I believe it would be reclassified once it is reprofiled.

Amazing, I make one small comment about statcan, and who do I get an email from this morning? Statcan firing another warning shot over my bow, I wish those people would relax and go harass somebody else. Pricks! Spineless thugs.

Pt

Comment from Paul Tulloch
Time: June 28, 2012, 6:07 am

Addendum, the pricks and spineless thugs commentary was directed at the CFIB and not statcan. As I meant to add that it was the Cfib that instigated the process.

Comment from Purple Library Guy
Time: June 28, 2012, 1:34 pm

Hrm. I’d say that in Canada then, large firms probably aren’t noticeably better, because most of them are branch plants relying on R&D done outside the country.

Also, “ability to survive” and “creating ever-increasing surpluses” are not the same thing. You’re a smart and knowledgeable guy, and you certainly have points about the labour standards problems of small firms. But you’re mixing concepts in a way that makes me thing “Gee, this guy has a knee-jerk response to small business”.

You said a bakery was a perfect example. Bakeries survive by baking things people want to eat. They have done so ever since there was such a thing as a shop where people bought things, since before there was any such thing as a large enterprise much less a TNC, and they will for the foreseeable future, even if for some bizarre reason every large enterprise is somehow wiped off the face of the planet. They are clearly not dependent on big business for their existence, that’s just piffle.

And the question of dependence actually cuts against the question of lack of productivity gains. To the extent that small businesses don’t take advantage of newer technologies and so fail to increase productivity, they are not dependent on the sources of such newer technologies, do not need to “latch onto wealth creating abilities of larger entities”. To the extent that they are dependent on newer technologies created by larger enterprises (or more likely by the public sector), they will be successfully increasing productivity. And to the extent that they do the latter, they are no different from large enterprises, none of which are large enough that their own home-grown innovations have nearly as large an impact on productivity as their ability to take advantage of the rest of the world’s innovations.

Overall, your claim strikes me as not only not right, but starting to approach not even being wrong. The notion seems incoherent and internally contradictory. Unless what you’re really saying is just “If it weren’t for big business people would be poorer and therefore small businesses would have fewer customers”–but that seems like a much more trivial claim than the impression you’re trying to give.
And if that’s true, it may have less to do with the nature of big business in terms of productivity and more to do with the ability of big business to erect barriers to entry, set prices . . . in general it may simply be that big business tends to be able to use its structural strengths to corner most of the more profitable niches and collect rents. After all, many of the most profitable big businesses (e.g. Nike, big garment trade businesses) use production technologies essentially identical to those of small businesses (poor people sitting at sewing machines) or in some cases even literally use cottage industry as their production method (piecework where garment workers work out of their homes). Yet such firms may well be able to increase employment in a way that small businesses attempting to compete with them cannot, because they can block such businesses from meaningful entry. Does that mean the world is better off, or even the industry more productive or innovative, with clothing production dominated by Nikes than it would be if it were dominated by independent small businesses or co-ops? Questionable at best.

Comment from Paul Tulloch
Time: June 28, 2012, 2:24 pm

PLG- look I guess we are not going to agree on this.

You seem to have a quite an affinity for bakeries. Personally most people cannot afford a bakery, so they go to the grocery store where they mass produce bread, based upon a production process, that through years of R&D and innovation brings us to modern day mass produced bread. And yes you are right, small bakeries have not changed much since the wind mill. So to me your are missing my point and arguing something else.

Like I said, yes there is a small group of small business that are indeed at the leading edge of job creation. But in order to have more bakeries, (small service firms etc) you need more demand generated, which can only be accomplished under the current economic system by productivity increases.

Incoherent- well I think you have quite a fascination with the ability of small business in providing the solutions for the masses. Personally, small business are the ones caught up in truly destructive competitiveness, and when one gets into that space, I find it hard to believe that productivity increases can be sought out. This is where we are seemingly in disagreement. I have indeed study technology, productivity and innovation quite a bit. And small business is not something I would say are the leaders in the majority.

They are laggarts and followers in most cases.

You can talk about co-ops and small independents, but I would reply that I just do not see the empirical results with small co-ops. Small farming in China potentially qualifies and sadly many of these people’s standard of living is quite low.

I also wanted to say that again, you take an example with Nike and assume everybody where such stuff, personally I come from class where not everybody has that kind of money and it is noname shoes and mock chicken sandwiches.

It is an interesting debate though, what are the positive effects of collusion and barriers to entry. One I have always used as an example is Bell Canada, love them or hate them, it was the monopoly they had that created Nortel, which eventually part of cost effectively delivering much of the know how to create and build the infrastructure of the internet, that to me is the kind of ubiquitous innovations that allowed a new found potential for productive gains of the economy as well as new communications channels.

And yes smaller companies played a part in evolving the net, but many of these did not stay small for long.

“but that seems like a much more trivial claim than the impression you’re trying to give.”

So on the one hand I am making this trivial claim, but on the other I am saying where do we get these productivity gains and hence where – full circle here- where does job creation come from- it is not small business as original causation.

Small business are fatalistically parasitic because they are an intervening variable in the causation of wealth creation. Is that clear enough?

Okay I got to get back to work here, I am working in the next phase of technology innovation- the age of the smart machine, with a knowledgable human at the helm- machine learning married to human learning is coming, and already here in some places.

Sadly not in your local bakery, the next phase of baking bread- the perfect loaf of higher quality affordable bread will someday be baked using a Support Vector algorithm will be sold at the local loblaws. And it will not be a small bakery that designs the algorithm.

Hopefully that bread will have a slice of real meat instead of mock chicken or Hormel waste.

Comment from Paul Tulloch
Time: June 29, 2012, 11:25 am

Just wanted to add something for the record, contrary to what I have written above- I do believe there is a role for small business in creating original value through innovation. It is through organizational effectiveness and small scale innovation. However, most studies will show that empirically that has not been the case, except for a small ecosystem of companies. I think the other point I need to add, amongst many in a very complicated argument that I am trying to make, where is the stability point with small business where destructive competitive pressures are contained and allow these small firms to stabilize and establish growth. How do these firms do this and excel at creating value and innovating- no matter where in the value chain they might be.

It is big subject and I will admit I generalized a lot into some of the statements above, but I do believe that small business is a whole different animal than medium and large. For example there is no HR department in a small business, there is very little training, there is no cushioning against cycles etc. A very different animal and then you can also get into a typology of fundamental differences within small business, as we have touched on above.

But I still stick to my guns, under the current formation of capital in the hands of small owners, they are not the major modality of job creation within our economic system. Under a different regulation of capital- they could be, but that is not how the formation of the value chains have evolved in Canada.

Comment from Ken Howe
Time: June 29, 2012, 3:33 pm

I can’t resist reformulating what Paul Tulloch says about bakeries. Isn’t it just that small bakeries are using established technology (therefore making them “parasitic” on earlier advances) and don’t devote any of their energies to improving productivity (thus not driving innovation)? So small bakeries aren’t parasitic on big business, they’re parasitic on already-existing technologies.

Comment from Jeff Dean
Time: July 5, 2012, 8:35 am

StatsCan today confirms your results.

Study: Firm Dynamics: Employment Growth Rates of Small Versus Large Firms in Canada, 1999 to 2008

http://www.statcan.gc.ca/daily-quotidien/120705/dq120705a-eng.htm

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