Young companies ‘best for job creation’

New companies are much more likely to create jobs than any other type of firm, according to a comprehensive study carried out by the Central Bank.

The study sheds new light in the crucial area of job creation, which has important implications for future government policies.

According to the paper’s author, Martina Lawless, “The main finding is that the disproportionate contribution of small firms in job creation is driven mainly by young firms — with entrants being particularly important. In line with learning models of firm growth, once the firm is established, the link between size and growth weakens dramatically.

“The interlinkage between age and size is therefore crucial in understanding where contributions to net employment growth originate. Because young firms make up a considerable proportion of all small firms but older firms tend to be more evenly distributed across different size classes, much of the effect of firm age may have been underplayed and attributed instead to the effect of size.

“We find that across all size categories, the youngest firms have the highest rates of job creation, generally by a considerable margin, and that they also make the largest contributions to total job creation. We also show that the younger firms are considerably less likely to stay in the same size class from year to year compared to the larger firms, demonstrating a greater dynamism amongst younger firms regardless of their size category.”

Consequently, an environment supportive of business start-ups might be more effective in creating new jobs rather than generic policies that are aimed at different sized firms, says Ms Lawlor.

“If taxation or technical assistance policies towards existing firms are to be targeted at a particular group of firms to maximise return on limited public resources, this suggests that an age criterion rather than one based on size should be considered,” she concludes.

On balance, smaller firms tend to have a much higher level of job creation than larger firms. But when age is factored into the mix, then the results change dramatically. For example, the smallest group of firms in the study had a 25% share of job creation, but when new entrants were taken out, the level of job creation reduced to 10%.

Moreover, the level of job destruction among small firms is much higher when new entrants are included in the results.

Overall, Ireland scores well for job creation, coming in well above the European average and close to US levels.