Firm dynamics and job creation in the UK: taking stock and developing new perspectives

WP6 A recurrent theme in the discussion of attempts to stimulate economic recovery in the UK is a recognition of the need to unlock the growth potential of the private sector. We survey some of the recent evidence on job creation and destruction built on the conventional accounting framework which leads to consider the particular contribution of ‘high growth firms’ (as defined by the OECD). Our argument is that neither job creation and destruction accounts nor the focus on high growth firms provide much insight into the key drivers of firm and job dynamics. A rather more informative approach can be built upon the ‘5 brutal facts’ of UK business demography: a) about 200 thousand firms are born each year, b) most new born firms are very small - 90% with less than five employees, c) after a decade more than 70% of new born firms are dead; d) the new born firms at birth have around one million jobs, those that survive a decade employ less than half a million, e) of those which survive a decade, around three quarters born with less than five employees, still have less than five employees. We knew already from the standard accounting by the job creation and destruction components that births and deaths of firms are responsible for a considerable amount of churn in the business population, but what the ‘brutal facts’ bring to the fore is that much of this churn is age-related. It provides a pointer to the dynamic underpinning to the evolution of the stock of firms in the economy over time: as each new ‘wave’ of firms is born, firms from earlier waves (younger rather than older) die away. Whilst this more thoroughly dynamic view has an obvious implication for policy – it cautions against expecting too much of policies which focus on promoting a greater volume of firm births. But before we can say more we need to be able to complement our appreciation of the implications of survival with a better understanding of growth. We will then be able to inform the design of a robust set of policy interventions.