Community Investments Vol 23, Issue 1
Small Business and Job Creation
It is a common belief among policymakers that small businesses are the engines of economic growth and job creation. This belief underlies government investments in and subsidies for small business, such as tax incentives, the loan guarantee programs run by the Small Business Administration, and programs that provide technical assistance and other small business development support. Yet academic research has been less sanguine about the relationship between business size and job growth. At issue are questions of methodology and data suitability – depending on the methodological approach taken and the data used, researchers have found mixed results for whether or not small businesses create more jobs than large ones.
In a recent NBER working paper, John Haltiwanger, Ron Jarmin, and Javier Miranda take on this question, and in doing so, provide new insights into why and how small businesses create jobs. Interestingly, although they find that job growth rates go down as business size goes up, this relationship disappears once they control for the age of the business. In fact, they find that the startup, or “birth,” of a business is the key factor influencing both gross and net job creation. Because new businesses tend to be small, the inverse association between business size and job creation in previous studies is almost entirely attributable to the fact that small businesses are often also new businesses.
This finding emphasizes the critical role played by startups in U.S. employment growth dynamics. Conditional on survival, young businesses grow more rapidly than their more mature counterparts, therefore accounting for a greater share of job growth. However, new businesses are also more likely to fail, which can also lead to significant job losses.
Haltiwanger and his colleagues emphasize that we need a better understanding of startups and young businesses, including the challenges they face in becoming established, their role in innovation and productivity growth, and how they fare in economic downturns and credit crunches. The research also points to the critical role that small business development organizations can play in helping to get new firms successfully off the ground.
John C. Haltiwanger, Ron S. Jarmin, and Javier Miranda (2010). “Who Creates Jobs? Small vs. Large vs. Young,” NBER Working Paper 16300, available online.
Financial Literacy and Wealth
According to traditional economy theory, individuals use economic information to make financial decisions that maximize their well-being across the life course. In general, this would lead to an accumulation of wealth during the working years, which in turn would support consumption after retirement. Yet survey evidence reveals that many older adults face significant retirement saving shortfalls, and that fewer than half of U.S. workers have even attempted to estimate how much money they might need in retirement.
Given this gap, is there a role for increased investments in financial literacy, which could improve retirement savings outcomes? What role does financial literacy play in wealth accumulation, particularly in terms of retirement savings? Jere Berhman and his colleagues examine this question in a recent NBER working paper. Previous studies have reported strong correlations between financial literacy and asset accumulation as well as retirement planning, yet questions remain about whether these associations reflect causality. Using a unique dataset on Chilean households, Berhman and colleagues are able to develop a more rigorous model to assess the importance of financial education for wealth accumulation over the life course.
The results show that for a nationally-representative sample of adults in Chile, financial literacy and educational attainment are both positively and significantly correlated with wealth accumulation, pension contributions, and retirement planning. Indeed, their estimates suggest that financial literacy is at least as important, if not more so, than schooling in explaining variation in household wealth and pension contributions. Berhman and colleagues argue that their findings are a strong endorsement of investments in financial literacy given its role in building household net wealth.
It is unlikely, however, that Behrman’s study closes the door on the question of the effectiveness of financial literacy. Are the findings from Chile transferable to the US context? Perhaps more importantly, their survey tested financial knowledge. Important questions still remain on how to teach financial knowledge, and which methods are the most effective. Still, Behrman and his colleagues provide compelling evidence that financial literacy does matter for long-term financial well-being.
Jere R. Behrman, Olivia S. Mitchell, Cindy Soo, and David Bravo (2010). “Financial Literacy, Schooling, and Wealth Accumulation, NBER Working Paper 16452, available online.
Say “gentrification”, and the image it conjures is almost always that of an older, inner-city neighborhood being taken over by new high-end restaurants, shops, and art galleries. But gentrification can happen in other neighborhoods as well, including inner-ring suburbs comprised mostly of single family homes.
Suzanne Lanyi Charles examines what is happening in these inner-ring suburbs in Chicago, and explores the factors that lead to a private sector driven residential development process in which older single-family housing is demolished and replaced with larger single-family housing. Single-family housing in inner-ring suburbs remains a significant part of the metropolitan landscape, and contains approximately 20 percent of the housing stock in the United States. As inner-ring suburbs have aged, some have begun to experience population and income decline, crime increase, and reduction in their tax base. Others, however, are experiencing a significant amount of reinvestment.
Charles explores what factors influence this reinvestment process, and finds that lots with smaller houses, lower floor area-to-lot size ratios (FAR), and lower ratios of their value to that of their neighborhood are more likely to be redeveloped. The median property value of a neighborhood does not have a large effect on whether a property is redeveloped, but neighborhoods with higher proportions of Black and Hispanic residents were significantly less likely to experience redevelopment. Increased distance of a property from the Chicago CBD, the nearest commuter rail station, and the nearest highway access point are each associated with a decrease in the odds of redevelopment. School district quality was very highly associated with redevelopment; the odds of redevelopment for properties located in the highest-ranked school districts are 2.5 times that of those that are not.
Understanding these processes of suburban gentrification is important since physical changes in the housing stock may lead to the displacement of original residents. Charles finds that when the properties in Chicago are redeveloped, the sale prices are typically at least three times that of the original. As Charles points out, continued redevelopment of single-family housing may limit housing options for low- and moderate-income households, especially in neighborhoods with good schools and access to other amenities such as transportation access. Charles’s paper helps to better understand why redevelopment occurs in some areas and not in others, information that can be used to craft more equitable and effective housing and urban development policies.
Suzanne Lanyi Charles (2011). “Suburban Gentrification: Understanding the Determinants of Single-family Residential Redevelopment, A Case Study of the Inner-Ring Suburbs of Chicago, IL, 2000-2010,” Joint Center for Housing Studies Working Paper W11-1, available online.