Productivity Growth and Employment Growth

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Previous Studies

This section accounts for a number of previous studies and theories concerned with small firms and their strengths and weaknesses. It does so in a wide sense, discussing also the importance of firm age and the role of the minority of small firms that grow rapidly, the so called “gazelles”, in job creation.The first two parts of this section makes a distinction between productivity growth and employment growth, and clarifies the growth prospects and ambitions of small firms in general. This is intended to provide the reader with an important fundament for interpreteting the other sections of this thesis.

Productivity Growth and Employment Growth

Growth in productivity and growth in employment does not by necessity follow each other. Several countries have experienced so called “Jobless Growth”, with a growing economy in terms of GDP but with persistently high unemployment. The United States experienced jobless economic growth in the early 1990´s and 2000’s (Schreft & Singh, 2003).An explanation of this that has been put forth is “Just in time employment practices” where employers offer only temporary employment and encourage workers to work overtime rather than employ more people. (Schreft & Singh, 2003) Arpaia (2005) identifies a few more explanations on jobless growth: One is that in economical downturns, firms show a higher level of determination to rationalize and avoid overspending and over-hiring. Thus, they may regain the same output level but with fewer employees. Moreover, structural change may impose a lagged unemployment effects as workers have to be adequately educated and allocated within the industries in which new jobs are being created. Generally, Arpaia (2005) states, firms respond to increases in demand by increasing productivity, and waits until the macroeconomic situation and the higher level of demand appears stable, before they increase the number of employees. The major EU economies (Germany, Spain, France, Italy and United Kingdom) have all been characterized by jobless growth recently. For the EU-15 in the years 1991-1995, employment decreased by an average of 0.3 % per year whereas productivity grew by 1.7 %. For the years 1995-2004, the inverse development could be found, with a yearly increase of employment by 1.2 % and an increase in productivity of only 0.9 %. Thus, employment growth and productivity growth are anything but directly related. (Arpaia, 2005)

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Most Small Firms Do Not Grow

Though this thesis rather extensively deals with the characteristics of small firms and their impact on employment growth, it should be clearly stated that most small firms do not grow. Only a small share of small firms in Sweden try to grow and only an even smaller share succeed. (Davidsson & Delmar, 2002). Frederiks et al (2002) found, in a study on small firms in the Netherlands, that 16 % of the small business owners at all aim to grow. According to Noteboom (1994), 10 to 20 percent of small firms are innovative, growthoriented and efficient. (Noteboom, 1994) Many small firms are imitative and exist within mature local markets. Hence, they have very low growth prospects and do not strive for growth. A study conducted in the 1980’s (Davidsson et al) showed that 40 % of business owners did not even think that their income stream would rise if the firm grew to have more employees. Rapidly growing firms are often found in dynamic environments with heterogeneous markets. Davidsson et al (2002) concludes that growth and employment decisions of small firms are determined by both managerial motivation as well as by external, environmental factors. (Davidsson et al, 2002) Gray (2002) studied motivational patterns as well as strategic outlook for small firms in the UK during the 1990’s. 46-52 % of the business owners, depending on which year studied,chose“independence/be own boss” as the most important personal motivation for running their business. 16-19 % chose “making money” and 6-11 % “no alternative/avoid unemployment”. As for strategic objectives of their firm, supporting a lifestyle was the most popular answer with 30-35 % of the answers, depending on which year studied. Increase of sales only yielded between 5 and 7 % of the answers. As most firms don’t even put increases in sales high on their agenda, there is little reason to expect them to grow in employment. (Gray, 2002).

Small and Large Firms

The economist Robert Gibrat argued, that the growth rate of firms is independent of firm size. From its publishing in 1931, Gibrat’s law was long nearly unchallenged as empirical studies found it hard to refute. However, as better data became accessible, and econometric studies more sophisticated, the theory has been proven deficient. Smaller firms appear to grow faster relative to their size, and the spread of growth rates are greater among smaller firms (Mata, 2008). Therefore, I do not concentrate at describing his theories in greater detail, but it deserves a mentioning since it long was widely accepted.For a long time, large firms were the center of attention in regard of economic growth and job creation, but during the 1970´s an increasing amount of academic findings changed this perception and shifted the focus to small and young firms as they were proved to create
more new jobs than large firms. This was contrasting the view that, due to returns to scale advantages, larger firms would drive smaller firms out of the market in many sectors (Johansson 2002; Carree & Thurik, 1999) More recent studies in the US and Western Europe have come to the same conclusion –Small firms account for a large share of new jobs, and large firms for a disproportionately large share of lost jobs (Johansson 2002). In manufacturing, large firms (by the American definition firms with more than 500 employees) accounted for 53 % of the jobs created between 1972 and 1988, but 56 % of the jobs destroyed, which indicates a net loss in the large firm sector (Carree & Klomp, 1996). In the United States, the employment share of the Fortune 500 firms decreased from 20 % to 10 % between 1970 and 1999. As for Europe, most manufacturing industries have seen an increasing share of small firms (Carree & Thurik, 1999).

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1 Introduction
1.1 Background 
1.2 Purpose of Study
1.3 Delimitations
1.4 Definition of Small Size Firms 
1.5 Outline of Study
2 Previous Studies 
2.1 Productivity Growth and Employment Growth
2.2 Most Small Firms Do Not Grow
2.3 Small and Large Firms 
2.4 Employment Growth in Small Firms 
2.5 Small and Young Firms
3 Empirics
3.1 Descriptive Statistics 
3.2 Model Specification 
3.3 Variables Specification
3.4 Data
3.5 Results 
3.6 Analysis of Results
4 Conclusion
List of references


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