Only a small proportion of small businesses grow jobs. We need to focus on young innovative businesses.
Yesterday was a good news day for the UK economy as it continued its steady if slow recovery from recession. The ONS data release revealed that the economy grew by 1.9% in 2013, its strongest rate since 2007. This came on the back of last week’s news that unemployment is declining. But who is responsible for this return to growth? Two days ago, David Cameron took to Youtube to deliver a message to small businesses that he seems to be crediting for much of this growth:
“You are the lifeblood of our economy. Over 90% of firms in the country are small firms, over 60% of the people working in the private sector work for businesses like yours, so please keep doing what you’re doing, creating the jobs, the wealth and success our country needs”
While he is right with his stats on where the stock of jobs are, it’s not obvious that when talking about who will be ‘creating the jobs’ in the future, small businesses are the best to focus on.
Over the past few years Nesta research has shown that a small proportion of businesses are responsible for the majority of job growth. The latest data has shown that just 7% of businesses are responsible for half of the jobs created between 2007 and 2010. With this in mind it is worth exploring what these high growth firms look like and whether Cameron’s focus on small businesses as the drivers of employment growth is justified.
Most high growth firms are quite small, which is unsurprising given, as was pointed out earlier, that most firms (90%) are small. But only a very low share of small firms are high-growth. In fact, small firms are not much more likely to grow fast than medium-sized firms. Looking at the data, it turns out that it is age, not size, that is a better predictor about which businesses are creating jobs. Regardless of what size businesses you look at, younger businesses are consistently more likely to be high growth than older ones.
But this too is too broad a category. Research shows that most startups fail in their first ten years and most of those who do survive stay small. The challenge then is identifying those young businesses that will survive and grow. What the data tells us here is that growth is strongly related to how innovative a business is and how skilled their workforce is. These are the businesses that have the ambition and ability to grow into large businesses and can make significant contributions to growing employment in the UK.
So while the 90% of businesses in the UK that are small are very important for a variety of reasons such as delivering vital services and being an important part of the fabric of society more widely, it’s important to understand that looking at them as a population when thinking about where jobs will come from is not the answer. UK discourse and policy needs to focus more on those innovative businesses, many of them young businesses, that have the ambition and potential to grow and can be the big employers of the future.