The Size Myth

The myth of small business as the engine of job creation traces back to a 1979 study by MIT researcher David Birch, who analyzed Dun & Bradstreet data and concluded that firms with fewer than 20 employees generated 66% of all new jobs. The statistic was immediately adopted by politicians of both parties, became the foundation of the Small Business Administration’s institutional identity, and has been repeated so often that it has achieved the status of unquestioned fact. There’s just one problem: Birch was measuring gross job creation, not net job creation, and the difference between the two is enormous.

Consider a barbershop that opens with three employees. That’s three jobs created. Two years later, the barbershop closes. Three jobs destroyed. Gross creation: 3. Gross destruction: 3. Net creation: zero. Now consider a hospital system with 5,000 employees that adds 50 new positions over the same period. Gross creation: 50. Net creation: 50. The barbershop’s rate of job creation was astronomically higher — it created 100% of its workforce from scratch — but its net contribution to the economy was zero. The hospital’s rate was modest (1%), but it added 50 permanent jobs to the economy. Small businesses create jobs at high rates because they start from zero, but they also destroy jobs at nearly equal rates because they fail at high rates. The net contribution is the difference between a very large positive number and a very large negative number — and that difference is often close to zero.

The BDS data makes this distinction crystalline. In Q1 2024, firms with 1 to 4 employees — the smallest category — created 934,000 jobs. That is, indeed, a large number, and it represents a gross creation rate of 14.8% of their employment base. But they also destroyed 941,000 jobs, a destruction rate of 14.9%. The result: a net loss of 7,000 jobs. Nearly a million jobs were created and nearly a million were destroyed, and the net effect was negative. These firms didn’t add jobs to the economy. They churned through jobs like a revolving door.

At the other end of the spectrum, firms with 1,000 or more employees created 1,240,000 jobs (a creation rate of just 2.3%) and destroyed 1,001,000 (a rate of 1.8%). Net: a gain of 239,000 jobs. These are the firms that politicians rarely celebrate at ribbon-cutting ceremonies — the Walmarts, the JPMorgans, the Boeings — but they contributed more net employment in a single quarter than the entire smallest-firm category did in a year. The largest firms don’t churn. They accumulate.

The relationship between firm size and dynamism follows a clean mathematical gradient, and understanding it resolves much of the confusion in the public debate. The total churn rate — jobs created plus jobs destroyed as a percentage of employment — is 29.7% for the smallest firms and 4.1% for the largest. That’s a factor of more than seven. In the world of the smallest businesses, nearly a third of all jobs turn over every quarter. In the world of the largest, barely one in twenty-five does.

But here’s the key insight: the net job creation rate is remarkably similar across all size classes. Excluding the smallest firms (which posted a slight negative), every category from 5-9 employees up to 1,000+ posted a net creation rate between 0.4% and 1.0% in Q1 2024. The differences are small and inconsistent from quarter to quarter. The net rate for firms with 500-999 employees (1.0%) was actually higher than for any other category, but that ranking shifts year to year. The point is that no single size class consistently dominates net job creation in percentage terms.

What does differ dramatically is the level of churn required to achieve that net result. The smallest firms create and destroy nearly 30% of their workforce every quarter to generate a net of roughly zero. The largest firms create and destroy about 4% to generate a net of 0.5%. The economy gets the same net result from both groups, but the small-business path involves vastly more turbulence, more hiring, more firing, more worker displacement, and more economic disruption per unit of net job created. It’s the difference between driving 100 miles to reach a destination 1 mile away (making many turns and detours) versus driving 5 miles in a straight line.

This pattern has an important policy implication. When politicians argue that small businesses deserve special support because they “create jobs,” they are conflating high gross creation with high net creation. A policy that helps a small business hire three people is genuinely helpful — to those three people, for however long the jobs last. But if the same business has a 50% chance of failing within three years, the expected net contribution approaches zero. A policy that helps a large business expand by 50 positions has a lower headline impact but a much higher probability of producing lasting employment.

The annual net job creation data by size class over the full 2000-2024 period reveals a pattern that would surprise most politicians. Large firms (250+ employees) produced positive net job creation in 21 of the 26 years, failing only during the three recessions (2003, 2008-2009, 2020) and one soft year (2015). Small firms (1-19 employees) produced positive results in 20 of 26 years but with much more volatility and much smaller absolute numbers. And in the recession years, small firms typically shed proportionally more jobs than large ones.

The most revealing comparison is the pandemic and its aftermath. In 2020, small firms shed 231,000 net jobs, medium firms (20-249) lost 245,000, and large firms lost 213,000 — a roughly proportional hit across all sizes. But in 2022, the recovery year, small firms gained just 175,000 net jobs while large firms gained a staggering 1,055,000 — six times as much. The large-firm recovery was powered by the rehiring of furloughed workers in healthcare systems, retail chains, hospitality conglomerates, and logistics companies. Small firms, many of which had died outright during the pandemic, couldn’t recover jobs that no longer existed at businesses that no longer operated.

The cumulative picture over 25 years is striking. If you sum up net job creation for each size group across the full 2000-2025 period, large firms (250+) produced approximately 3.6 million net jobs. Medium firms (20-249) produced about 3.5 million. Small firms (1-19) produced about 2.0 million. The idea that small businesses are responsible for the majority of job creation is a statistical illusion created by looking at only one side of the ledger. When you look at net creation — the only metric that matters for actual employment growth — large and medium firms contributed about 78% of the total.

None of this means small businesses are unimportant. They are the incubators from which some large businesses eventually emerge. Amazon was a small business in 1994. Google had 40 employees in 1998. The economic value of small firms lies not in their current employment contribution but in their optionality — the probability that a tiny fraction of them will become the dominant firms of the next generation. But celebrating small business for job creation is like celebrating a venture capital fund for its investments rather than its returns. The inputs are impressive. The net output, for most, is close to zero.

The relationship between firm size and churn rate is not just a statistical curiosity — it illuminates why declining dynamism, the subject of Episode 2, matters so much for the economy’s long-term health. The smallest firms operate in a state of constant creative ferment: nearly 30% of their workforce turns over every quarter. This is where experimental business models get tested, where niche markets get discovered, where an immigrant with a food cart proves there’s demand for a cuisine that no established restaurant serves. The economic function of small-firm churn is discovery — finding out what works through rapid trial and error.

As we documented in Episode 2, the gain rate for firms with 1-4 employees has fallen from 18.9% in 2000 to 14.8% in 2024. That’s a 22% decline in the rate at which the smallest firms discover and create new employment opportunities. The loss rate fell proportionally (from 18.3% to 14.9%), so these firms are also failing less. The net effect on employment is roughly neutral — small firms are creating fewer jobs and destroying fewer jobs — but the effect on innovation may be substantial. Less churn means fewer experiments, fewer new business models tested, fewer chances for the next Amazon to emerge from a garage.

The largest firms, by contrast, operate in a state of institutional stability. Their 4.1% churn rate means that 96% of their workforce is in the same position from one quarter to the next. This is the world of career jobs, institutional knowledge, and incremental expansion. The economic function of large-firm behavior is execution — deploying proven business models at scale, efficiently producing goods and services for mass markets. Both functions are essential. An economy needs discoverers and executors, startups and incumbents, barbershops and hospital systems.

The declining dynamism story is primarily about what’s happening at the small end. Large firms haven’t changed much: their gain rate dropped from 3.6% to 2.3%, their loss rate from 2.3% to 1.8%. The absolute changes are modest. But small firms have seen their metabolism drop by a quarter. The discovery engine is running slower, even as the execution engine hums along. This is the structural shift that no amount of political rhetoric about “small business job creation” can paper over.