Evan Soltas
Jul 4, 2012

Has David Slain Goliath?

The future of the working American lies not with the conglomerate Goliath but with the start-up David.

Using the firm-size breakdowns of ADP employment report data on FRED, I found that:

(1) The contraction of employment in the United States was driven primarily by large firms, and so has the recovery of employment been by small and medium-size firms.

(2) The American economy is undergoing a long-term structural shift of the distribution of employment away from large firms to small firms.

First, a few definitions: I define firm size here as number of employees. Firms with 500 employees or more are "large," firms with 50 employees or less are "small," and firms with between 50 and 500 employees are "medium" sized.During the recession of 2008, employment in large firms declined far more than did employment in small and medium-size firms. At the trough of the recession, the number of employees at large firms had declined 8.6 percent relative to December 2007. That is a substantially larger drop than the 7.9 percent of all employees shed by medium-size firms, or the 5.6 percent shed by small firms.When nonfarm payroll employment began to recover in January 2010, hiring at small and medium-size firms drove the employment recovery. Employment at small firms has grown 3.5 percent, and at medium firms by 4.1 percent, since the start of 2010 -- whereas at large firms, employment has increased by only 1.1 percent over the same period of time.

Yet the data do not suggest that the recession functioned as a single shock which asymmetrically affected firms by their size, causing large firms to contract employment or fold more frequently than small and medium-size firms.

No. What's going on is bigger than the most recent recession. It appears to be a long-term structural shift in which larger firms are losing ground to small firms. Medium-size firms are holding even. The most compelling explanation I can think of for this phenomenon is that firm size is becoming less determinative of a firm's ability to achieve economies of scale, and to complement this, that macroeconomic and microeconomic change implies increasing returns to "nimbleness," innovation, low fixed costs, and other traits which characterize small firms.Consider this. In December 2000, 41.7 percent of Americans on nonfarm private payrolls worked for firms who employed less than 50 people; in May 2012, 44.9 percent of Americans work for such firms. That increase of 3.2 percentage points mirrors the decrease seen at large firms. In December 2000, 18.7 percent of Americans on nonfarm private payrolls worked for firms who employed over 500 people; in May 2012, 16.3 percent of Americans now work for such firms -- a decrease of 2.4 percent.

Another way to think about the secular shift from large firms to small ones is by using Riemann sums to approximate the average size of a nonfarm private firm in the United States. In December 2000, the average firm employed 213 people; in May 2012, the average firm employed 199 people. That amounts to a decrease in average firm size of 6.6 percent.Notably, the recession of 2008 is barely visible in this graph, which confirms the point that this isn't about cyclical movements, but rather a structural change to market structure and the distribution of employment.