Yes, high growth firms create the most jobs. But it’s the everyday businesses that provide work for those who need it most

Every politician wants to ally themselves with the small business community.

Take David Cameron, who last month described this crowd as “the lifeblood of our economy”. Or on the other side of the political spectrum, Ed Miliband, who promised to “go into the next election as the party of small business and enterprise.” Little wonder, given that the growing number of self-employed will soon have more electoral clout than the shrinking public sector workforce.

But are their tributes justified? Not so, according to the team at Nesta. In a blog last week, they persuasively argued that the praise given to small businesses for their role in job creation is largely misguided. According to their data analysis, it’s the tiny number of high growth firms – the famous 7 per cent – that generate the majority of new jobs. Their calculations show that such firms, defined as averaging over 20 per cent employment growth over 3 years – were responsible for creating over half of all new jobs in the period between 2007 and 2010.

Moreover, these firms are distributed fairly evenly across the UK (something I was surprised to hear). As expected, London and the South East have the highest number, but even the regions at the lower end of the scale like Wales and the West Midlands have a high proportion of high growth firms (close to 5 per cent each). They also have a decent presence in every sector – from construction, to retail, to business services.

So far, so rosy. But gauging the impact of different firm types on employment is not as simple as totting up the quantity of jobs created. We also have to think about the quality of those jobs, as well as who is taking them. And therein lies the rub. While high-growth firms may create the most jobs, it’s the everyday small businesses that provide work for those who need it most. Recent research by the Federation of Small Businesses, for example, found that the unemployed who enter the private sector are now more likely to find work in your run-of-the-mill small business than anywhere else.

The same is true of others on the economic and social margins. Data analysis by the Institute of Economic Affairs highlighted that women, individuals from certain ethnic groups, those with young dependents, those with low or no qualifications, and those with language difficulties make up a far greater proportion of the workforce in small firms than they do in large ones. For instance, 10.7 percent of employees in microbusinesses have no qualifications, compared with 3.8 percent in the largest firms.

An obvious rebuttal here is that typical small businesses have a high level of job churn. That is, they destroy as many jobs as they create. Moreover, such businesses are unlikely to be able to offer training opportunities or high levels of pay. Yet despite these drawbacks, the employees of small establishments report greater satisfaction and lower levels of work-related illness.

Of course, all of this gets a little confusing when you consider that most high-growth businesses are technically ‘small’. But for all intents and purposes they are geared towards becoming larger entities, and are therefore likely to share the same characteristics. Indeed, it’s hard to picture them sacrificing their productive edge to accommodate a workforce with a lower skill base or English language difficulties.

So while yes, we should acknowledge and seek to support the fastest growing firms, let’s not forget the everyday businesses that provide opportunities to those who most need them.

The RSA and Etsy are exploring similar themes in a new project, The Power of Small.

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