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July 2004, Vol. 127, No. 7

Why size class methodology matters in analyses of net and gross job flows

Cordelia Okolie

One of the most interesting and often asked questions in empirical economics
is whether small businesses create the most jobs. Answering this question requires longitudinal establishment microdata and is an ideal application for the new Business Employment Dynamics data series produced by the Bureau of Labor Statistics. Although it is often argued that small businesses are the fountainhead of job creation and the engine of economic growth, this view is not universally accepted, largely because of differences in the methodology used to construct net and gross job flow statistics. Using different methodologies, this article calculates net and gross job flow statistics by size class, with the aim of showing how alternative methodologies can produce sharply different portraits of employment growth.

Three methodology issues influence the calculation and interpretation of business employment dynamic statistics by size class: (1) how establishments should be classified into size classes in the construction of net and gross job flow statistics, (2) the appropriate measure to use in the denominator in the calculation of net and gross job flow rates, and (3) whether there are differences in the statistics if the establishment or the firm is the unit of analysis.¹

Defining size classes. With cross-sectional microdata, defining size classes for establishments is straightforward. For example, an establishment with 3 employees is classified into the category "1 to 4 employees," and an establishment with 11 employees is classified into the category "10 to 19 employees." By contrast, defining size classes with longitudinal microdata is more difficult. For instance, if an establishment grows from 3 employees in the previous quarter to 11 employees in the current quarter, in which size category does it belong?

This excerpt is from an article published in the July 2004 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.

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Footnotes
1 One other issue that has been raised in the gross job flows literature is the definition of a small business. This article presents its statistics using BLS standard size class categories. Users can then aggregate categories in the manner they wish to for various definitions of the term small business.

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