Which Firms Will Be Founts of New Jobs?

Small companies play a modest role in job creation

IN early 1993, Washington State's job outlook appeared bleak: The bellwether Boeing Company said it would have to lay off 19,000 workers within two years. Logging restrictions were squeezing the timber industry. And aluminum producers were forced to cut output and jobs.

Yet the state wound up creating enough new jobs last year to post a net employment gain - albeit a modest 1.4 percent.

Part of the reason may be found here on Seattle's ``east side,'' where small start-up firms are springing up in fields such as biotechnology and computer software. Musicware Inc. employs only nine people full time but is among scores of high-tech firms in a sprawling Redmond office park. If the privately financed start-up succeeds at selling its computer-based piano lessons, more products and jobs will follow.

Economists agree that the dynamism of small companies has kept the job count moving upward nationally, as in the Northwest, despite continued downsizing by many large corporations. But is small business the whole story?

Many economists say it is too early to count the big boys out of the job-creation game. Downsizing at many of the larger companies is matched by ``upsizing'' at others.

For example, Microsoft Corporation, with new buildings built on its Redmond ``campus'' headquarters, has added thousands of jobs in the past few years to help produce new software. So has Nordstrom, the retailer based in Seattle. Many corporations shedding workers also are reaping productivity gains that could lay the foundation for future payroll growth.

One Wall Street economist predicts that investors, recognizing the global reach of these companies as the world economy recovers, will make this the ``year of the multinational corporation.''

Still, the conventional wisdom is that such entrepreneurial small firms are the founts of new jobs.

Firms with 100 or fewer employees account for 67 percent of all new jobs, said economist David Birch at a recent conference on job creation. On average, though, the percentage varies widely over time. Moreover, most of this growth occurs in a small percentage of firms, the fast-growing ``gazelles,'' says Dr. Birch of Cognetics, a Cambridge, Mass., consulting firm.

The gazelles span all industries, not just high-tech. But the firms tend to have strong, visionary leaders who apply technology and other innovations to their business. Birch, writing with colleague James Medoff of Harvard University, says politicians should be asking themselves ``what public policies will facilitate this growth'' of gazelle firms?

Not so fast, responds another paper delivered at the Milken Institute conference by Steven Davis of the University of Chicago, John Haltiwanger of the University of Maryland, and Scott Schuh of the Federal Reserve Board. Their study is confined to one important sector, manufacturing, and finds that firms with fewer than 100 employees accounted for only about one-fourth of all new jobs in the 1973-88 period.

Many studies, the economists say, wrongly focus on ``net'' new jobs rather than ``gross'' new jobs. Consider three firms: Big Firm A lays off 500 workers, Big Firm B adds 500, and Small Firm C adds 50. The net score: Small firms, 50, big firms, zero. This method thus makes 50 jobs at a small company seem more important than 500 at a big firm.

Once the numbers are crunched properly, small companies are seen to play a more modest role in job creation. They do create jobs at a higher rate than big firms, but they also fail much more easily.

Birch counters that the security of large corporations is fast diminishing: ``In the 1950s and '60s, ... it took 20 years for one-third of the Fortune 500 to be displaced from the list; ... in the 1980s, it was only five years.''

Yet he backpedals from defining gazelles as exclusively small firms: He says these firms ``move between small and large quickly ... and to classify them by their size as either is to miss their uniqueness: great innovation and rapid job growth.''

Amid all the debate over job creation, officials are not focusing enough on job retention, says business leader George Haymaker. Washington State's aluminum industry has lost almost 2,000 jobs in the last two years.

As chief of Kaiser Aluminum and Chemical Corporation, Mr. Haymaker calls for government to take an attitude of greater partnership with industry, while not interfering in the marketplace.

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