Who Creates Jobs?

Editor's note: Dorsati Madani is a Senior Economist at the World Bank's Strategy and Analysis Unit (CICSA) of the Investment Climate Advisory

There is widespread perception that small businesses are the primary creators of jobs in most countries. A presentation from the World Bank's recent Conference on Entrepreneurship and Growth entitled, "Who Creates Jobs? Small vs. Large vs. Young" used US census data to add an interesting twist to the debate regarding the role of firm size in employment creation.

The paper finds that business start-ups contribute substantially to both gross and net job creation, but that young firms also have very high rates job destruction due to frequent failures. Conditional on survival, young firms grow more rapidly (in terms of employment) than their more mature counterparts. A related finding is that once the authors account for firm age, it becomes the definitive factor in job creation. Firms employing 5-499 employees are found to have lower net growth rates than the largest firms (10000 or more workers) in the economy. 

These results raise an interesting policy issue. Assuming a similar pattern of job creation for developing countries, how do we reconcile the emphasis placed by development institutions - including the WBG - on small and medium enterprise (SME) development? Is this sub-sector the right focus of our PSD efforts? If so, how can we ensure not only SME creation, but survival to support net job creation over the medium to long term? On the other hand, if the SME approach does not create the net medium to long term jobs so desperately needed in high unemployment developing countries, what should our policy recommendations be?