JOB CREATION AND DESTRUCTION IN THE CORPORATE SECTOR: THE RELATIVE IMPORTANCE OF BIRTHS, DEATHS AND SURVIVORS
Peter E. Hart and Nicholas Oulton University of Reading and National Institute of Economic and Social Research January 1998
NIESR Discussion Paper No. 134
Address for correspondence Nicholas Oulton National Institute of Economic and Social Research 2 Dean Trench Street LONDON SW1P 3HE UNITED KINGDOM Tel: +44 (0)171 222 7665; fax: +44 (0)171 222 1435; e-mail:
[email protected]
CONTENTS Page Abstract
1
I.
Introduction
2
II.
The data
3
The OneSource database
3
Other databases
4
III.
Corporate births
8
IV.
Corporate deaths
11
V.
Job generation
14
VI.
Conclusions
23
References
24
Appendix A: The population of UK companies
27
Appendix B: The OneSource database and the company population
31
Appendix C: Corporate mortality
34
ABSTRACT A major new database (OneSource) of UK companies is used to estimate the contribution of independent companies of all sizes to employment change in the corporate sector over the period 1990-1992. Our estimates cover jobs gained and lost by corporate births and deaths as well as employment change in surviving companies. There is no tendency for the corporate birth rate to decrease monotonically with increases in company size and there is certainly no case for postulating that new companies tend to have one optimum size such as Minimum Efficient Scale. In contrast, the corporate death rate does decrease with increases in company size. Over this period the net effect of births and deaths was negative for virtually all sizes of company. Overall, 0.614 million jobs were gained by births but 1.119 million lost by deaths. Another 600 thousand jobs were lost in surviving companies. Much of this loss occurred in large companies but medium size companies (33-512 employees) also shed jobs in large numbers. Taking account of births, deaths and survivors, only companies with 1-8 employees were net creators of jobs over this period. But the absolute numbers created were fairly small to set against losses amongst larger companies. Keywords JEL codes
Job creation, company births, company deaths, small firms, growth L11, J23
1
I. INTRODUCTION1 The purpose of this paper is to assess the contribution of different sizes of company to the process of job creation and destruction. We seek to answer such questions as, is it true that most new jobs are created by small companies? We shall examine the relative importance of jobs created as a result of the birth of new companies, jobs lost as a result of the death of old companies, and jobs gained or lost in companies which survived.
These questions sound simple but they are surprisingly difficult to answer, mainly because the necessary data are not readily available. A large part of this paper has therefore to be devoted to describing how we estimated employment for all companies in the corporate sector. The starting point of our work is the OneSource database of company accounts, but though very large this is still only a sample of companies and moreover many included companies do not report employment.
Using the Gibrat and Galton-Markov models, Hart and Oulton (1996a) showed that surviving small firms in the UK were growing faster than large firms and hence, among surviving firms, they were generating proportionately more jobs. The present paper extends this analysis to include corporate births and deaths. Clearly, the stochastic model of firm growth based on the lognormal distribution used there had to exclude births and deaths. Births were included by Simon and Bonini (1958) in their Yule model, but their assumption that all births were in the smallest size class is not appropriate, as we shall see. Subsequent development of such models has been hindered by inadequate data on corporate births and deaths. The OneSource database used here fills this gap.
Section II compares the available data and explains the advantages of the OneSource database. Sections III and IV show the effects of corporate size on births and deaths as revealed by the OneSource sample. Section V links these results with findings for surviving companies to reveal the net effects of the size of company on job generation, 1
We owe thanks to the Leverhulme Trust for financing this research as part of a wider project entitled Job generation in the corporate sector [F/59/AD]. The usual disclaimer applies.
2
after uprating the OneSource sample to the whole corporate population. The conclusions are summarised in section VI. Appendices A, B and C provide more details of the data on the total company population including the population of corporate deaths and births. In effect they form the statistical workshop of this paper.
II. THE DATA The OneSource database The OneSource database is compiled by OneSource Information Services Ltd. We have used the 1991 and 1993 vintages in our work to date (Hart and Oulton 1995, 1996a and 1996b) Each of these vintages comprised some 140,000 companies, of which about 87,000 are independent (non-subsidiaries).2 The OneSource database is a subset of a much larger database of all actively trading companies compiled by ICC Online Ltd from accounts held at Companies House. In the years with which we are concerned, Companies House held the records of some 1.2 million companies. However, at any point in time some 166,000-200,000 companies were in the process of being removed from the register. In addition, a roughly similar number were “dormant”, a special legal status which allows a solvent company to continue to exist while not trading. The total number of UK companies is discussed in Appendix A.
We use the consolidated accounts of UK independent companies, which include the results of their subsidiaries. The UK subsidiaries of overseas companies account for over 22% of total corporate employment and are important enough to merit a separate paper. Balance sheet data are available for virtually all companies since this is a legal requirement, whatever the size of company. However, sales and other items of the profit and loss account need not be revealed by smaller companies, and no company is obliged to publish employment. Fortunately, however, many companies go beyond the minimum legal requirements. In fact, about 58% of independent companies publish employment and two thirds publish sales. Thus these data are available for many
2
The number of useable observations is rather fewer than the 87,000 independents in each vintage. Companies with accounts more than 3 years out of date were excluded as were companies which reported implausible values for some variables, e.g. zero sales even though supposedly actively trading. Data cleaning thus reduced the number of independents to 83,573 in the 1991 vintage and to 84,028 in the 1993 one.
3
thousands of even quite small companies. A logarithmic regression of employment on assets was estimated for those companies reporting both figures and used to estimate the employment of those companies reporting assets but not employment. However, over 85% of total estimated corporate employment is in companies which report employment.
Though we refer to the 1991 and 1993 vintages of the OneSource database, the actual data relate to slightly earlier periods in both cases. Companies have different reporting dates and there is a lag in adding them to the database. Weighting by employment, the average end of the accounting year for independents was about the mid-point of 1990 for the 1991 vintage and about the mid-point of 1992 for the 1993 vintage. So we refer to changes between the 1991 and 1993 vintages as occurring between 1990 and 1992.
An important feature of the database is that all companies have a unique registration number given them by Companies House. It is therefore possible to match companies across successive vintages. Companies which feature in the earlier but not the later vintage give us a measure of company deaths. As the registration numbers were assigned in chronological order, they can be used to derive the date of incorporation which enables us to identify company births.
Other databases The OneSource database has a number of advantages over other sources (the latter have been reviewed by Storey and Johnson 1990). First, it is representative of all companies, in all sectors of the economy. By contrast, the Annual Census of Production (ACOP) only covers the production sector, now reduced to about a third of GDP. Also, ACOP is based on businesses (formerly establishments), which correspond neither to plants nor to companies. Second, OneSource covers companies of all sizes. Much previous work on companies (see references below) has focused on about 1,500 quoted companies. Most quoted companies are large. Studies based on such sources (e.g. EXSTAT) can only take a very limited account of the role of size. Moreover unlike the present paper their results are not uprated to encompass the whole corporate population. 4
Because the OneSource database relates to companies, it excludes the self-employed, partnerships and unincorporated sole traders. It does not therefore cover the tremendous growth in the numbers of self-employed in recent years. Other databases, such as that of Dun and Bradstreet, include many thousands of unincorporated firms. Against this, it might be argued that the Dun and Bradstreet credit rating criteria produces a bias towards the faster growing small firms.
The rise in the numbers of self-employed is linked to the fall in employment. Age discrimination is not illegal in the UK and as relatively expensive, male, full-time employees aged forty and over are made redundant they find it increasingly difficult to obtain another job. So they become self-employed, often receiving work subcontracted from their previous employer, who may well encourage them to obtain company status. This boosts the number of one-employee companies discussed in Appendix B.3
Their former employer gains because he no longer has to pay
employers' national insurance and superannuation contributions or any other of the many non-wage labour costs. In addition, the employer can more easily match his flow of orders with his labour force by sub-contracting peak flows of work to experienced former employees. So the thousands of births of new firms, in the form of the self-employed, or one-employees companies, are more readily explained by institutional rules than by an economic model. The same is true for the deaths of these firms which occur either when the self-employed retire or die.
The self-employed pay Class 2 (and Class 4, above a profit threshold) national insurance contributions and Schedule D income tax, whereas the employed usually pay Class 1 contributions and are taxed under Schedule E in the PAYE scheme. Their numbers are therefore known. But there is a large overlap between these groups because so many employees also have income from self-employment and vice versa.
3
The Inland Revenue is making it increasingly difficult for such former employees to become selfemployed for tax purposes. So the former employees respond by becoming companies. Company status has many of the same tax advantages as self-employment by contrast with being an employee, e.g. a much more generous treatment of business expenses.
5
Moreover, many of the self-employed are working part-time and it would be misleading to count each of such “firms” as one. Thus we cannot use the statistics on the numbers of self-employed, or sole proprietors, as a guide to the birth of new firms. Nor can we use the statistics of the number of jobs created by sole proprietorships as a guide to the job generation propensity of very small firms. This is because the sole proprietor has a tax incentive to employ his or her spouse as a part-time employee, providing the spouse’s earnings do not exceed the tax-free personal allowance.
These technical issues were not examined in the report by the Small Firms Statistics Unit of the Department of Trade and Industry on the statistics of small firms in the UK in 1993 (DTI 1995). Their counts were based on the total number of businesses in the Inter-Departmental Business Register (IDBR). This new register was established in 1993 and is administered by the Office for National Statistics (ONS). It holds records of all businesses operating a PAYE tax scheme and all those registered for VAT, covering some 1.7 million businesses in 1993 and including some 1.5 million self-employed. It estimates that there were 1.9 million unregistered businesses and 2.1 unregistered self-employed in 1993. In total some 1.3 million self-employed were in partnerships and there were some 2.3 million sole proprietorships. These estimates are not comparable with earlier figures so that no indicators of net birth and death rates are available from this new source.
Another standard source is the number of firms registered for VAT (value-added tax). These were used by Ganguly (1985) and have been criticised by Johnson and Conway (1995). The problem is that they exclude firms below the VAT threshold of sales. Firms which fall below this threshold and deregister are not necessarily deaths, and those which rise above it and have to register are not necessarily births. The VAT threshold has been increasing in real terms in recent years so that the VAT statistics of births are biased downwards and those of deaths are biased upwards.
The truncation problem also arises in the size distribution of manufacturing firms in the Annual Census of Production, now known as the Annual Business Inquiry (Manufacturing). Small businesses below the threshold size are not required to make a return to the Census. So a comparison of Census numbers in consecutive years does 6
not just reveal the combined effect of births and deaths: it also reflects the numbers crossing the threshold. Geroski (1991) obtained special tabulations of changes in the numbers of businesses reporting to the Census in consecutive years and equated them to births and deaths. For example, the mean number of births in each industry in his sample of 87 industries fell from 95.73 to 62.29 between 1974 and 1975 (Geroski, Table 2.1, page 13). In both years the threshold was 20 employees and so the tabulations include surviving firms crossing this threshold in addition to true births and deaths.
The same problem arises in the special tabulations of the births and deaths of manufacturing businesses 1981-1990 obtained by Lansbury and Mayes (1996) from the ONS. They showed that the birth rate increased from 3.88 per cent in 1981 to reach a peak of 8.97 per cent 1989 before declining to 7.28 per cent in 1990. Death rates were more stable, ranging between 5.26 and 6.75 per cent over the period. Once again, the size distributions of businesses were truncated at 20 employees so that surviving businesses crossing this limit in either direction were counted as births and deaths.
Unfortunately, the truncation point of 20 employees, if applied to the whole economy, would exclude over 93 per cent of companies which were below this size (see Table 3 below). In particular, it excludes the fast growing small companies below eight employees which were identified by Hart and Oulton (1996). The OneSource database enables us to go below the ACOP truncation point.
Another problem with using the ACOP numbers of businesses on their register as a guide to births and deaths is this figure sometimes shows implausibly large changes. For example, between 1983 and 1984 the number of establishments covered by ACOP jumped from 107,000 to 138,000 due to the adoption of a new business register. This is yet another illustration of how difficult it is to obtain reliable data on births and deaths of firms.
Two further sources are the database held by Professor Beesley at the London Business School, based on HM Inspector of Factories data, and the Department of 7
Trade and Industry monitor of new firms used by Creedy and Johnson (1983). But these sources also have problems of truncation, coverage and the measurement of the self-employed. Thus all sources of information on births and deaths have shortcomings.4 Even the huge OneSource database does not have complete coverage of the very small companies. Indeed, it has to be supplemented by extrapolation techniques, especially in order to estimate the distributions of corporate births and deaths.
III. CORPORATE BIRTHS A birth is identified by the date of the company’s incorporation which is encoded in its registration number. Registration numbers are assigned by Companies House in chronological order; the last number assigned in any year is known for every year from the present back to the start of registration in the first half of the 19th century. By interpolation, we can assign dates of incorporation within each year. More precisely, a company in the 1993 database is regarded as a birth if its date of incorporation is in 1990 or later and it does not appear in the 1991 database.5 Such companies are regarded as births, though they may have been sole proprietorships or partnerships before incorporation.
As noted in section II, not all companies report employment and those which do may be atypical. So birth rates by company size would be misleading if based only on companies reporting employment. This difficulty was overcome by estimating employment for non-reporting companies from the logarithmic regression relationship 4
The Small Business Research Survey undertaken in 1991 provides some data on births which have been used, for example, by Kitson (1995) in his study of linkages between unemployment and firm formation. Other work at the Small Business Research Centre at Cambridge, by Cosh, Hughes, and Kambhampati (1993) uses a panel of over 2000 companies registered at Companies House in 1975. Chittenden, Muktar and Poutziouris (1994) at the Manchester Business School use the NatWest/SBRT Quarterly Survey of small businesses (1295 firms) and a sample of 31,000 firms from members of the Forum of Private Business, the Federation of Small Business, the Rural Development Commission and a list of 1000 registered BS5750 users provided by the DTI. Storey and his colleagues at Warwick (e.g. Batstone and Mansfield 1994) have also undertaken surveys of SME which yield results on births and deaths, as have Gallagher and his colleagues at Newcastle using the Dun and Bradstreet data. All the discussion so far relates to the UK. But there has also been extensive research on the topic in other countries. For example, for USA see Audretsch (1991), Audretsch and Mahmood (1994), Dunne, Roberts, and Samuelson (1989) and for Portugal see Mata and Portugal (1994) .
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between employment and assets for those companies reporting both variables. Then birth rates by employment size class were estimated for virtually the whole sample.
The dependent variable in the regression equation was the log of employment and the independent variables were the log of total assets, a constant, five dummies for company status (e.g. private or plc) and nine dummies for the Division of the 1980 SIC. To estimate the size of new-born companies where this was not reported, the regression was run on all independent companies in the 1993 vintage of the database; to estimate the size of non-reporting companies which died or which survived (see below), the regression was run on all independent companies in the 1991 vintage.
Our necessarily restricted definition of the birth of a firm makes it difficult to use a theoretical model of entry, such as that of McCloughan (1995). He postulates a twostage process in which economic agents in the first stage gather information and learn to become potential entrants and then in the second stage enter an industry in a Poisson process and learn to compete with incumbent firms. In our data, by the time these entrants have grown enough to become companies, they are well past the initial learning stage.
McCloughan assumed that the size distribution of births is lognormal. Table 1 shows that the skewness of the logarithms of births in the OneSource sample is low but the distribution is leptokurtic. The OneSource sample is very large but it is not random and omits a relatively high proportion of small companies.
The distribution of
company births in the independent corporate population may well be lognormal, as postulated by McCloughan. There is certainly a wide dispersion of the sizes of births and some chance process in addition to systematic factors is probably at work. There is no case for postulating that new entrants tend to be one optimum size or at Minimum Efficient Scale (MES).
5
A company incorporated in 1990 would produce its first set of accounts in 1991, so it might in principle appear in the 1991 database, though in practice very few do.
9
Table 1
Birth rates of independent companies in OneSource sample in 1990-1992: by 1992 employment size class Size class
Class 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
Range (employees) ≤1 >1&≤2 >2&≤4 >4&≤8 > 8 & ≤ 16 > 16 & ≤ 32 > 32 & ≤ 64 > 64 & ≤ 128 > 128 & ≤ 256 > 256 & ≤ 512 > 512 & ≤ 1,024 > 1,024 & ≤ 2,048 > 2,048 & ≤ 4,096 > 4,096 & ≤ 8,192 > 8,192 & ≤ 16,384 > 16,384 & ≤ 32,768 > 32,768 & ≤ 65,536 > 65,536 & ≤ 131,072 131,072+ TOTAL
All companies Number 737 2,346 5,164 10,334 17,510 20,379 14,367 6,835 3,134 1,533 778 383 211 117 86 51 38 21 4 84,028
Births Number 52 171 372 635 895 791 561 402 275 146 72 29 11 5 5 0 1 0 0 4,423
Birth rate % 7.1 7.3 7.2 6.1 5.1 3.9 3.9 5.9 8.8 9.5 9.3 7.6 5.2 4.3 5.8 0.0 2.6 0.0 0.0 5.3
Summary statistics, log employment in 1992 Births Survivors Mean 3.0453 3.0463 Standard deviation 1.4905 1.3069 Skewness 0.5980 0.8194 Kurtosis 3.5981 5.9335 Number of companies 4,423 79,605 Source
OneSource (1993 database).
Note Births defined as companies in the 1993 database which (a) were incorporated in 1990 or later and (b) were absent from 1991 database. Survivors defined as all other independent companies present in 1993. Skewness and kurtosis defined so as to be zero for a normal distribution. Employment partly estimated: see text.
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Table 1 shows that the geometric mean size of sample corporate births, and of surviving companies by employment was 21.0 employees. It can be seen that the corporate birth rate declines with increases in size until companies reach 64 employees. The birth rate then increases sharply to reach 9.5% in the size class 257512 employees.
Above this size, the tendency for the birth rate to decrease is
resumed. Even so there are too many large company births for us to use any model of new entry based on small firms only. As shown in Table B1 in Appendix B, in the corporate population as a whole, the top 1.24% of companies issued over 99% of the total new capital. These larger companies, each with an issued capital of at least £100,000, were relatively small in number but presumably extremely important in terms of market penetration.
As we shall see in a moment, the number of births in the sample is only about a fifth of the number of deaths. But we know from Companies House statistics that in the corporate population as a whole births and deaths were about equal over the 19901992 period. The most likely explanation for this disparity is that OneSource undercounts births amongst small companies. When a company dies it must obviously disappear from the database and must then be replaced. But analysing the replacement companies, those which appear for the first time in the 1993 database, we find that a majority were already in existence in 1990 and so could have been included in the 1991 database. Hence in order to estimate the number of jobs generated by corporate births, it is necessary to move from the OneSource sample data in Table 1 to the estimated births of independent companies in the whole corporate population; this is done in section V below.
IV. CORPORATE DEATHS A company is defined to have died if it ceases to be active. This definition includes not only those previously active companies which are dissolved or liquidated but also those which become dormant but remain on the register of companies.6 In practice, in this section which looks at the OneSource sample, we judge a company to have died if 6
At any one time, about a quarter of the companies on the register are either dormant or in the process of liquidation (Appendix A, Table A1).
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it appears in the 1991 vintage but not the 1993 vintage. Table 2 shows an overall death rate in the sample of 25.6%. This matches quite well the rate which can be estimated for the population over the two year period.7
Corporate mortality is
discussed further in Appendix C.
Table 2 shows death rates by employment size within the sample. As with births, this table shows death rates for the whole sample, not just those companies which reported employment. It can be seen that the death rate decreases with increases in the size of company and that the size distribution of deaths after logarithmic transformation has low skewness but is still leptokurtic. One reason for emphasising the dispersion and positive skewness of the distribution of corporate deaths before logarithmic transformation, is to explain why economic models confining such deaths to the bottom of the size distribution of companies are not adopted here.
As mentioned in section III, the OneSource sample is very large but it is not random and the leptokurtosis in the sample distribution of company deaths does not imply that we are unable to accept McCloughan’s (1995) lognormal model of company deaths in the population. On the contrary, in section V we find it very convenient to assume that the population distribution is lognormal.
The geometric mean size of corporate deaths in the OneSource sample is 15.2 employees compared with 25. 3 for surviving companies in 1990. A comparison with Table 1 shows that on the (geometric) average, deaths tend to be smaller than births. The geometric mean size of surviving companies tended to decrease between 1990 and 1992, though it must be stressed that the definition of survivors differs between the
7
Assuming that 13.1% of the effective number of companies on the register are dormant (see Appendix A), then the death rate of actively trading companies was 11.8% in 1990-1991 and 14.0% in 1991-1992: see Companies in 1993-94, Table A1 (DTI 1995). The death rate is calculated as the number of companies dissolved divided by the active total adjusted for dormancy. This does not correspond exactly to the concept of death employed here since a dissolved company may have ceased to be active at an earlier date. Also deaths should include companies which become dormant but which are not immediately dissolved. But assuming that all dormant companies are eventually dissolved then in a steady state (which seems a reasonable approximation here given that the effective number on the register did not change much over this period) the calculated death rate should be close to its theoretical counterpart.
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Table 2
Death rates of independent companies in OneSource sample in 1990-92: by 1990 employment size class Size class
Class 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
Range (employees) ≤1 >1&≤2 >2&≤4 >4&≤8 > 8 & ≤ 16 > 16 & ≤ 32 > 32 & ≤ 64 > 64 & ≤ 128 > 128 & ≤ 256 > 256 & ≤ 512 > 512 & ≤ 1,024 > 1,024 & ≤ 2,048 > 2,048 & ≤ 4,096 > 4,096 & ≤ 8,192 > 8,192 & ≤ 16,384 > 16,384 & ≤ 32,768 > 32,768 & ≤ 65,536 > 65,536 & ≤ 131,072 131,072+ TOTAL
All companies Number 707 2,124 4,820 9,718 16,648 20,067 15,398 7,596 3,271 1,541 745 387 212 129 89 54 36 26 5 83,573
Deaths Number 338 847 1,760 3,048 4,924 5,246 3,398 1,175 412 146 60 20 15 8 4 1 1 1 0 21,404
Death rate % 47.8 39.9 36.5 31.4 29.6 26.1 22.1 15.5 12.6 9.5 8.1 5.2 7.1 6.2 4.5 1.9 2.8 3.8 0.0 25.6
Summary statistics, log employment in 1990 Deaths Survivors Mean 2.7199 3.2322 Standard deviation 1.1653 1.3452 Skewness 0.1640 0.8669 Kurtosis 4.3670 5.9034 Number of companies 21,404 62,169 Source
OneSource (1991 database).
Note Deaths defined as companies which were present in the 1990 database but not in the 1992 one. Survivors defined as companies which were present in both 1990 and 1992 (NB: this definition differs from that of Table 1). Skewness and kurtosis defined so as to be zero for a normal distribution. Employment partly estimated: see text.
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Tables 1 and 2. In Table 1, survivors include companies which appear for the first time in the 1993 database but are nevertheless known to have existed in 1990. In Table 2, survivors are companies present in both the 1991 and 1993 databases, since only for these companies is 1990 employment known. The other difference between Tables 1 and 2 is of course that employment is for 1992 in Table 1 and for 1990 in Table 2. It is also worth noting that in Table 2, amongst the survivors are 2,432 companies which were independent in 1990 but had become subsidiaries by 1992.
V. JOB GENERATION How many jobs were created on a net basis by companies of different sizes? We could do this calculation by looking only at companies for which employment is available. But this would be misleading for two reasons. First, obviously the firms with missing employment would be excluded. Second, the included firms may not be typical. As noted above, this difficulty can be overcome by estimating employment for those companies not reporting it.
An additional difficulty is that OneSource undersamples small companies, so in order to estimate the jobs generated in the corporate population we need to adjust for this as well. Our approach is to estimate the total number of independent companies in 1990 and 1992 from Companies House data and then to gross up the OneSource sample numbers in the lower size classes so as to yield in aggregate the estimated total number of companies. Appendix A explains how we estimated the total number of independents in 1990 and 1992 and the total number of births over 1990-1992. The total number of deaths over 1990-1992 was then derived from the identity: deaths ≡ births – net change in number of companies. Appendix B explains the procedure for grossing up the OneSource sample numbers. It is assumed that the population distributions are lognormal; the lower tail below 8 employees is then estimated by extrapolation from the observed distributions above 8 employees using equation (B1). For births, the estimated population frequencies in the smallest size class are very large but these are consistent with the known population of all new companies distributed by issued capital, as explained in Appendix B.
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For each size class, the following identity holds: Net change in employment ≡ Jobs gained due to births – Jobs lost due to deaths + Net job change in surviving companies. The average size of a new-born company and of a dead one in each size class come from OneSource as does the average change in size of a survivor. These are well estimated from the large number of observations in the OneSource sample. In each size class, jobs gained due to births are then estimated as the number of newborn companies multiplied by the average employment size (actual or estimated) in 1992 of a new-born company. Jobs lost due to deaths are estimated in each size class as the average size of a dead company in 1990 multiplied by the number of dead companies. Job creation or destruction in surviving firms was calculated as the average change in employment between 1990 and 1992 of companies which appear in both vintages of the database multiplied by the number of survivors.
We start by showing the estimated population size distribution of independents in 1990 and 1992 (Table 3).8 Both size distributions are very similar and highly skew. The main difference between the two years is a 3.3% fall in the estimated total number of companies. The overwhelming preponderance of small companies is immediately apparent. Four fifths of all companies employ no more than 1 person. However such companies account for less than 4% of total employment. By contrast, the top three size classes, those employing 32,769 or more, accounted for a negligible proportion of companies but more than a third of total employment. Dividing companies up into two groups, SMEs with up to 512 employees and larger companies, the SMEs account for virtually all the companies but only 29-30% of the employment.
8
Fractional averages appear in Classes 1 and 2 as a result of using a continuous variable, assets, to estimate employment from the logarithmic regression. Part time employment is a justification for this statistical result; one person might be the sole employee of more than one company.
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Table 3
Class 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
Employment size distributions of independent companies, 1990 and 1992
Size class Companies Range (employees) Number 594,444 ≤1 40,086 >1&≤2 32,487 >2&≤4 15,445 >4&≤8 16,646 > 8 & ≤ 16 20,067 > 16 & ≤ 32 15,397 > 32 & ≤ 64 7,596 > 64 & ≤ 128 3,271 > 128 & ≤ 256 1,541 > 256 & ≤ 512 745 > 512 & ≤ 1,024 387 > 1,024 & ≤ 2,048 212 > 2,048 & ≤ 4,096 129 > 4,096 & ≤ 8,192 89 > 8,192 & ≤ 16,384 54 > 16,384 & ≤ 32,768 36 > 32,768 & ≤ 65,536 26 > 65,536 & ≤ 131,072 131,072+ 5 TOTAL 748,663
1990 Employment % Number 79.4 501,744 5.4 74,742 4.3 109,422 2.1 97,039 2.2 200,524 2.7 466,078 2.1 693,927 1.0 668,746 0.44 577,025 0.21 546,635 0.10 534,629 0.05 556,178 0.03 618,649 0.02 752,666 0.01 1,059,286 0.01 1,266,155 0.00 1,708,805 0.00 2,327,361 0.00 802,774 100.0 13,562,383
% 3.7 0.6 0.8 0.7 1.5 3.4 5.1 4.9 4.3 4.0 3.9 4.1 4.6 5.5 7.8 9.3 12.6 17.2 5.9 100.0
Companies Number 572,309 39,562 32,070 14,718 17,510 20,379 14,367 6,835 3,134 1,533 778 383 211 117 86 51 38 21 4 724,106
Source Number of companies in size classes 5-19 and mean size in all classes from OneSource. Number of companies in size classes 1-4 estimated by extrapolation (see Appendices A and B).
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1992 Employment % Number 79.0 496,641 5.5 75,044 4.4 108,951 2.0 92,915 2.4 211,299 2.8 471,598 2.0 645,727 0.9 604,505 0.43 554,907 0.21 543,903 0.11 550,591 0.05 550,897 0.03 612,948 0.02 677,873 0.01 999,448 0.01 1,185,054 0.01 1,731,093 0.00 1,815,445 0.00 653,436 100.0 12,582,274
% 3.9 0.6 0.9 0.7 1.7 3.7 5.1 4.8 4.4 4.3 4.4 4.4 4.9 5.4 7.9 9.4 13.8 14.4 5.2 100.0
Table 3 shows us only a snapshot at two different points in time. The companies in a particular size class in 1990 are not the same as those in the same size class in 1992. We cannot therefore employ this table to derive the contribution of companies of different sizes to employment change. For this we must trace the history of individual companies between these two dates. We start with births and deaths, shown in Tables 4 and 5. There were some 614 thousand new jobs generated by births, though this was more than matched by 1.119 million jobs lost due to deaths. There is no clear relationship between size of company and either the number of jobs created by births or the number lost by deaths. 42% of the jobs generated by births occurred in companies with over 512 employees, while this group of larger companies accounted for only 33% of the jobs lost due to deaths. It follows that of the net loss of jobs due to births and deaths as a whole, only 22% was due to larger companies. Put another way, over this two year period SMEs accounted for 78% of the net job loss due to births and deaths.
Looking in more detail at the balance of births and deaths, we see that in the smallest size class jobs gained and lost balanced almost exactly: about 120 thousand jobs gained by births versus 118 thousand lost by deaths. There were particularly large net losses in classes 6 and 7 (17-64 employees).
Net job change in surviving companies is shown in Table 6. For reasons discussed below, size class 1 is omitted. It is estimated that between 1990 and 1992 the population of surviving independent companies lost a total of around 600,000 jobs. Up to size class 6, with 17-32 employees, these companies created jobs. Above this size companies tended to lose jobs, with substantial job losses occurring in the large size classes 17 and 19. In fact surviving SMEs were net generators of jobs, while larger companies were net destroyers. This is consistent with the previous result in Hart and Oulton (1996a) that among surviving companies the smaller ones grew relatively to the larger companies.
17
Table 4
Class 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
Number of births and employment generated by births, 1990-1992: companies which were independent in 1992 Number of Average Jobs Proportion Size class companies, size in 1992 generated of total 1990-92 Range (employees) (employees) (employees) % 138,298 0.9 119,756 19.5 ≤1 4,901 1.9 9,535 1.6 >1&≤2 3,578 3.4 12,316 2.0 >2&≤4 3,515 6.3 22,125 3.6 >4&≤8 895 11.8 10,576 1.7 > 8 & ≤ 16 791 23.1 18,260 3.0 > 16 & ≤ 32 561 46.4 26,008 4.2 > 32 & ≤ 64 402 90.5 36,389 5.9 > 64 & ≤ 128 275 181.1 49,803 8.1 > 128 & ≤ 256 146 353.9 51,675 8.4 > 256 & ≤ 512 72 703.0 50,614 8.2 > 512 & ≤ 1,024 29 1,431.2 41,506 6.8 > 1,024 & ≤ 2,048 11 2,924.5 32,170 5.2 > 2,048 & ≤ 4,096 5 5,655.2 28,276 4.6 > 4,096 & ≤ 8,192 5 11,647.6 58,238 9.5 > 8,192 & ≤ 16,384 0 n.a. 0 0.0 > 16,384 & ≤ 32,768 1 46,935.0 46,935 7.6 > 32,768 & ≤ 65,536 0 n.a. 0 0.0 > 65,536 & ≤ 131,072 131,072+ 0 n.a. 0 0.0 TOTAL 153,485 n.a. 614,182 100.0
Source Number of companies in size classes 5-19 and 1992 size in all classes from OneSource. Number of companies in size classes 1-4 estimated by extrapolation (see Appendices A and B).
18
Table 5
Class 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
Number of deaths and employment lost by deaths, 1990-1992: companies which were independent in 1990 Number of Average Jobs lost Proportion Size class companies, size in 1990 of total 1990-92 Range (employees) (employees) (employees) % 139,236 0.8 117,523 10.5 ≤1 11,599 1.9 21,626 1.9 >1&≤2 9,032 3.4 30,422 2.7 >2&≤4 2,764 6.3 17,365 1.6 >4&≤8 4,924 12.0 59,314 5.3 > 8 & ≤ 16 5,246 23.2 121,844 10.9 > 16 & ≤ 32 3,398 45.1 153,143 13.7 > 32 & ≤ 64 1,175 88.0 103,446 9.2 > 64 & ≤ 128 412 176.4 72,679 6.5 > 128 & ≤ 256 146 354.7 51,790 4.6 > 256 & ≤ 512 60 717.6 43,057 3.8 > 512 & ≤ 1,024 20 1,437.2 28,743 2.6 > 1,024 & ≤ 2,048 15 2,918.2 43,772 3.9 > 2,048 & ≤ 4,096 8 5,834.6 46,677 4.2 > 4,096 & ≤ 8,192 4 11,902.1 47,608 4.3 > 8,192 & ≤ 16,384 1 23,447.3 23,447 2.1 > 16,384 & ≤ 32,768 1 47,466.8 47,467 4.2 > 32,768 & ≤ 65,536 1 89,513.9 89,514 8.0 > 65,536 & ≤ 131,072 131,072+ 0 160,554.8 0 0.0 TOTAL 178,042 n.a. 1,119,437 100.0
Source Number of companies in size classes 5-19 and 1990 sizes in all classes from OneSource. Number of companies in size classes 1-4 estimated by extrapolation (see Appendices A and B).
19
Table 6
Number of survivors and net employment gained in survivors, 1990-1992: companies which were independent in 1990
Size class Class 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
Range (employees) >1&≤2 >2&≤4 >4&≤8 > 8 & ≤ 16 > 16 & ≤ 32 > 32 & ≤ 64 > 64 & ≤ 128 > 128 & ≤ 256 > 256 & ≤ 512 > 512 & ≤ 1,024 > 1,024 & ≤ 2,048 > 2,048 & ≤ 4,096 > 4,096 & ≤ 8,192 > 8,192 & ≤ 16,384 > 16,384 & ≤ 32,768 > 32,768 & ≤ 65,536 > 65,536 & ≤ 131,072 131,072+ TOTAL
Number of companies, 1990-92
24,101 20,625 10,601 11,723 14,821 11,999 6,421 2,859 1,395 685 367 197 121 85 53 35 25 5 106,118
Mean Total net Proportion change in jobs of total size, generated 1990-92 (employees) (employees) % 3.5 85,076 -14.2 3 61,193 -10.2 2.6 27,666 -4.6 1.7 19,983 -3.3 0.3 3,841 -0.6 -2.1 -24,792 4.1 -6.9 -44,575 7.4 -6.9 -19,637 3.3 -7.6 -10,562 1.8 -24.1 -16,495 2.7 -69.3 -25,415 4.2 3.6 716 -0.1 -356.4 -43,128 7.2 -951.5 -80,881 13.5 224.3 11,890 -2.0 -6,739.50 -235,882 39.3 -761.4 -19,036 3.2 -58,008.90 -290,045 48.3 n.a. -600,083 100.0
Source Number of companies in size classes 5-19 and mean change in size in all classes from OneSource. Number of companies in size classes 2-4 estimated by extrapolation (see Appendices A and B). Size class 1 (1 employee) omitted: see text.
20
The exclusion of one-employee surviving companies from Table 6 requires further explanation. In the OneSource sample there are 707 surviving companies in the lowest size class in 1990. Their average employment growth was 5.1 employees, or 610%. If we apply this average increase to the 310,254 surviving companies of this size in the population, as estimated from equation (B1), we have nearly 1.6 million new jobs created in the lowest size class over the two years.
This is wildly
implausible. It is also inconsistent with Table 3 which shows approximate stability in the numbers in size class 1. If those in size class 1 in 1990 were typically growing very fast and exiting this size class, their numbers would have to be replenished by initially larger companies reducing their employment. There is no evidence that this was occurring on anything like the necessary scale.9 It would therefore appear that the OneSource sample of 707 one-employee companies is biased towards the fast growers. An additional reason for treating results for one-employee companies with caution is that they are often sole proprietorships before incorporation and the resulting transfer from the statistics of self-employment to employment does not generate new jobs in any meaningful economic sense.
Table 7 combines the results of Tables 3, 4 and 5 to show the total net generation of jobs by size class, excluding size class 1. It can be seen that the total jobs lost through deaths exceeded those gained by births to give a net loss of 507 thousand. When added to the jobs lost by surviving companies, there was a total loss of over 1,107 thousand. The smaller companies up to 8 employees appear to have increased their employment on net by 148 thousand, though this result is influenced by the corrections of the OneSource undersampling of companies in these size classes.
9
Inter-class mobility is influenced by the variance of growth rates in different size classes, discussed in Hart and Oulton (1996b).
21
Table 7
Job gains and losses due to births, deaths ands survivors, a 1990-1992: companies which were independent in 1990 Jobs Jobs lost gained by by deaths births Size class
Class 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
Range (employees) >1&≤2 >2&≤4 >4&≤8 > 8 & ≤ 16 > 16 & ≤ 32 > 32 & ≤ 64 > 64 & ≤ 128 > 128 & ≤ 256 > 256 & ≤ 512 > 512 & ≤ 1,024 > 1,024 & ≤ 2,048 > 2,048 & ≤ 4,096 > 4,096 & ≤ 8,192 > 8,192 & ≤ 16,384 > 16,384 & ≤ 32,768 > 32,768 & ≤ 65,536 > 65,536 & ≤ 131,072 131,072+ TOTAL
Number Number 9,535 21,626 12,316 30,422 22,125 17,365 10,576 59,314 18,260 121,844 26,008 153,143 36,389 103,446 49,803 72,679 51,675 51,790 50,614 43,057 41,506 28,743 32,170 43,772 28,276 46,677 58,238 47,608 0 23,447 46,935 47,467 0 89,514 0 0 494,426 1,001,914
Net Net job Total Total change change in change in change due to survivors employas births and ment propdeaths ortion of 1990 employment Number Number Number % -12,091 85,076 72,985 97.6 -18,106 61,193 43,087 39.4 4,760 27,666 32,426 33.4 -48,738 19,983 -28,755 -14.3 -103,584 3,841 -99,743 -21.4 -127,135 -24,792 -151,927 -21.9 -67,057 -44,575 -111,632 -16.7 -22,876 -19,637 -42,513 -7.4 -115 -10,562 -10,677 -2.0 7,557 -16,495 -8,938 -1.7 12,763 -25,415 -12,652 -2.3 -11,602 716 -10,886 -1.8 -18,401 -43,128 -61,529 -8.2 10,630 -80,881 -70,251 -6.6 -23,447 11,890 -11,557 -0.9 -532 -235,882 -236,414 -13.8 -89,514 -19,036 -108,550 -4.7 0 -290,045 -290,045 -36.1 -507,488 -600,083 -1,107,571 -8.5
Source Total change in employment is jobs gained by births less jobs lost by deaths plus net job change in survivors. Number of companies in size classes 5-19 and mean change in size from OneSource. Number of companies in size classes 2-4 estimated by interpolation (see Appendix A). Size class 1 (1 employee) omitted: see text. a. For births, companies which were independent in 1992.
Even with these corrections, the job increases in the smaller size classes were insufficient to offset the massive job losses in size classes above 8 employees, particularly those lost in size classes 6-9 and 14, 15 and 17-19. Note that the 148
22
thousand estimated jobs created by companies with 8 or fewer employees were outweighed by the 152 thousand jobs lost by companies in class 7 with 33-64 employees. If small and medium enterprises (SME) are defined as those up to 512 employees, it is seen that they are net job losers. There does not seem to be a case for relying on the SME to reduce unemployment. The most that can be claimed is that the job losses of the very largest companies were even greater, though some of these losses may have amounted to redistributions of labour to new one-employee companies, discussed in Appendix B, or to the unincorporated sector including selfemployment. To increase employment it might be necessary to foster the growth of the larger rather than the smaller companies.
Finally, it must be stressed that the tables relate to independent companies: subsidiaries of overseas companies are excluded. There is no official estimate of employment in the corporate sector, let alone in independent companies. But we may compare the fall in corporate employment of 1,108 thousand with the fall of 768 thousand which occurred in the whole private sector over the same period, mid-1990 to mid-1992 (Economic Trends Annual Supplement 1996, Table 3.4; self-employment excluded). The difference of some 340 thousand may be attributed to increases in employment in the unincorporated private sector, in the UK subsidiaries of overseas companies, and in one-employee companies. These three categories are excluded from Table 7.
VI. CONCLUSIONS The size distributions of corporate births and deaths are positively skew and have wide dispersion. There is no case for assuming that corporate births are all in the smallest size class or tend to be of one optimum size. Nor can it be assumed that corporate deaths relate only to small companies: large companies also die. Corporate death rates tend to decrease with increases in company size (Table 1). But for birth rates the picture is more mixed. Birth rates tend to be highest in the middle size classes (129-1,024 employees) though falling with size thereafter.
23
Over the 1990-1992 period about twice as many jobs are estimated to have been lost through corporate deaths (1.119 million) as were gained by births (0.614 million). Jobs gained by births were fairly evenly spread through the size classes. Those lost through deaths were more concentrated, with a third falling amongst companies with 17-128 employees (Tables 4 and 5). However, job changes in surviving companies matched the conventional view more closely. Companies with up to 32 employees in 1990 added more employees over the period, while the largest companies were downsizing. Overall, some 600,000 jobs were lost amongst surviving independents. Survivors employing more than 32,768 shed 545 thousand. Survivors employing up to 32 people added 198,000. But medium sized companies of 33-512 employees also shed jobs in considerable numbers, contrary to the conventional wisdom (Table 6).
Netting off deaths from births, we find that virtually every size class from smallest to largest was a net job destroyer. Allowing also for job change in surviving companies, the bottom three size classes (1-8 employees) turn out to be net job creators. All larger size classes were net job destroyers. Apart from this however, there is no clear relationship between job creation or destruction and size. The top three size classes were again large job shedders, but so too were companies with 17-256 employees (Table 7).
The greater propensity of very small firms to create new jobs may be the result, at least in part, of various Government policies to stimulate the growth of “small and medium-sized companies” (SMEs), usually defined as companies employing up to 500 people. Unfortunately, the number of jobs created by the smallest companies is very small compared with the number lost by larger, including medium-sized, companies. In order to obtain a significant increase in employment, it may be necessary to introduce policies which foster the employment growth of larger companies.
REFERENCES Audretsch, D. (1991). “New firm survival and the technological regime.” Review of Economics and Statistics, 68, 520-526. 24
Audretsch, D. and Mahmood, T. (1994). “The rate of hazard confronting new firms and plants in US manufacturing.” Review of Industrial Organisation, 9, 41-56. Batstone, S. and Mansfield, E. (1994). “Births, deaths and turbulence in England and Wales.” Warwick Business School, Small and Medium Enterprise Centre, Working Paper No. 4. Beesley, M. (1955). “The birth and death of industrial establishments: experience in the West Midlands conurbation.” Journal of Industrial Economics, 4, 45-61. Chittenden, F., Mukhtar, S.M. and Poutziouris, P. (1994). “Prospects for small and medium size firms.” Manchester Business School, Working Paper No. 284. Cosh, A., Hughes, A. and Kambhampati, U. (1993). “Size, growth and failure: an analysis of the UK quoted and unquoted sectors.” Small Business Research Centre, University of Cambridge, Working Paper No. 32. Creedy, J. and Johnson, P.S. (1983). “Firm formation in manufacturing industry.” Applied Economics, 15(2), 177-187. Department of Trade and Industry (1994). Companies in 1993-94. London: HMSO. Department of Trade and Industry (1995) Companies in 1994-95. London: HMSO. Department of Trade and Industry (1995). Small and Medium Sized Enterprise (SME) Statistics for the United Kingdom, 1993. June. URN 95/92. Dunne, T., Roberts, M. and Samuelson, L. (1989). “The growth and failure of US manufacturing plants.” Quarterly Journal of Economics, 104, 671-688. Gallagher, C.C., Daly, M.J. and Thomason, J.C. (1991). “The growth of UK companies and their contribution to job generation, 1985-1987.” Small Business Economics, 3, 269-286. Ganguly, P. (1985). UK Small Business Statistics and International Comparisons. London: Harper and Row. Geroski, P. (1991). Entry and Market Dynamics. Oxford: Blackwell. Hart, P.E. and Oulton, N. (1995). “Growth and size of firms.” National Institute of Social and Economic Research Discussion Paper No 77. [A shortened version has been published as Hart and Oulton (1996a)]. Hart, P.E. and Oulton, N. (1996a). “Growth and size of firm.” The Economic Journal, 106 (September), 1242-1252. Hart, P.E. and Oulton, N. (1996b). “Job creation and variations in corporate growth”. National Institute of Economic and Social Research Discussion Paper No. 95. 25
Johnson, P. and Conway, C. (1995). “How good are the UK VAT registration data at measuring firm births?” University of Durham, Department of Economics Working Paper No. 147. Kitson, M. (1995). “Seedcorn or chaff? Unemployment and small firm performance.” ESRC Centre for Business Research, University of Cambridge, Working Paper No. 2. Lansbury, M. and Mayes, D. (1996). “Entry, exit, ownership and the growth of productivity.” In D. Mayes (ed.), Sources of Economic Growth. Cambridge: Cambridge University Press. Mata, J. and Portugal, P. (1994). “Life duration of new firms.” Journal of Industrial Economics, 42, 227-245. McCloughan, P. (1995). “Simulation of concentration development from modified Gibrat growth-entry-exit processes.” Journal of Industrial Economics, 43, 405433. Office of National Statistics (1996) Economic Trends Annual Supplement. London: HMSO. Simon, H.A. and Bonini, C.P. (1958). “The size distribution of business firms.” American Economic Review, 48, 607-617. Storey, D.J. and Johnson, S. (1990). “A review of small business employment databases in the United Kingdom.” Small Business Economics, 2, 279-299.
26
Appendix A: The Population of UK Companies
There are two main official sources of information about companies on the Companies House register. One is the regular DTI publication entitled e.g. Companies in 1993-94 (DTI, HMSO, 1994) which gives aggregate statistics covering Great Britain. The other is a CD-ROM which Companies House has recently started issuing, “The CD-ROM directory”. This lists all companies on the register and covers the whole of the UK. The amount of detail available about each company is not very great: the registration number, the date of incorporation, the type of company (e.g. private limited, plc, etc.), the type of accounts (full, medium, small, etc.), and company status (e.g. whether dormant or not). We used the issue which gives data up to the end of November 1996.
Companies House distinguishes between the total number of companies on the register at any one time and the “effective” number. The latter excludes companies which were (a) in liquidation and (b) in course of removal from the register. There are roughly equal numbers in these two categories. The OneSource database excludes these two categories and also a third, “dormant” companies. Dormant companies are companies which are not actively trading and which have applied for this special status. Some dormant companies may be in the process of being liquidated but the majority are not.10 Let the active total be defined as the effective total less dormant companies not in the process of liquidation. The active total is the population of which OneSource is a sample.
Table A1 shows the number of companies by status at end November 1996. The actively trading total was 1.019 million, substantially fewer than the 1.341 million companies on the register. Both totals include subsidiaries as well as independents.
10
A company is dormant if it has had no significant accounting transactions during the period. Dormancy is a legal status which has to be applied for by passing a special resolution. Its advantage is that a dormant company is required to produce only abbreviated accounts. A company may become dormant as a step on the road to dissolution or liquidation. In fact, 9.5% of all dormant companies, 14,042 companies, were dissolved, in liquidation, or in receivership in 1996. But the majority of companies which enter one of the latter states was not previously dormant.
27
Table A1
Companies on Companies House register at end November 1995: by status at end November 1996 (UK)
Status Total on register Of which: Dissolved In liquidation In receivership Effective number on register Of which: Dormant Actively trading Source
A1.
Number 1,341,125 99,080 77,031 12,475 1,152,539 133,883 1,018,656
Companies House, “The CD-ROM directory”, November 1996.
The total number of independent companies in 1990 and 1992
At the end of March 1990, which corresponds roughly with the average fiscal year end of companies in the 1991 OneSource database, there were 1,175,400 companies on the register for Great Britain (not the UK). The effective total was 1,009,700 (Source: Companies in 1993-94, DTI, HMSO, 1994, Table A1). Unfortunately, this source does not give the number of dormant companies. However, the Companies House CD-ROM gives this information for November 1996. At that date, there were 133,883 dormant companies which were not in course of removal from the register, 13.1% of the total actively trading at that date (1,018,656): see Table A1. Though the DTI publication covers only Great Britain, the CD-ROM also covers Northern Ireland. Companies registered in Northern Ireland constituted 1.7% of the effective total.
Assuming that these proportions applied in March 1990, the total of active UK companies at that date was 1,009,700 x (1-0.131) ÷ (1-0.017) = 892,604.
For the calculation of job gains and losses in independent companies, we also need to exclude subsidiaries from the active total. Unfortunately, neither the DTI publication nor the CD-ROM gives this information. But something can be learned from the most recent version of the OneSource database. This comprises two “volumes”, covering
28
110,000 larger companies in volume 1 and 250,000 smaller companies in volume 2. The criteria for inclusion were as follows. For larger companies, • All plcs • All companies with employment greater than 50 • The top companies based on turnover, net worth, total assets, or shareholders’ funds (whichever is the largest), up to a maximum of 110,000 companies.
The criteria for inclusion for smaller companies were all companies which were not in volume 1 and which report turnover, net worth, total assets, or shareholders’ funds (whichever is the largest), of at least £38,000 [presumably, though the documentation does not say so, up to a maximum of 250,000 such companies]. For both volumes, these criteria were applied after screening out all dormant companies and companies in the process of liquidation, in receivership, etc.
Subsidiaries comprised 44.8% of larger companies but only 12.7% of smaller companies. It would be therefore be reasonable to assume that 12.7% is an upper bound for the proportion of companies which are subsidiaries amongst omitted active companies in the 1991 and 1993 OneSource databases.
The OneSource sample of companies in 1990 contained 130,755 companies, of which 83,573 were independents. Therefore there are 892,604 – 130,755 = 761,849 omitted active companies. Of these at most 12.7% or 96,755 are subsidiaries. So the total number of active independent companies is estimated to be between an upper bound of 83,569 + 761,849 = 845,058 and a lower bound of 83,569 + (1-0.127) x 761,849 = 748,663.
Now apply the same arguments to 1992. The effective total was 979,800 in March 1992 and the active total was 866,171. There were 84,019 independents and 48,857 subsidiaries in the 1993 database with useable data, 132,876 companies in all. Hence the number of independents in March 1992 is placed between 724,106 and 817,314.
29
A2.
The total number of independent births 1990-1992
According to Companies in 1994-95, Table A1 (DTI, HMSO, 1995), there were 115,500 new incorporations in 1990/91 and 111,900 in 1991/92 or 227,400 births over the relevant two year period. (The figures for adjacent years are similar). But this total must be adjusted downwards since some of these births will have already died by mid 1992. About 24% of companies born in the two year period 1994-96 had died by the end of it, according Appendix B. So applying this percentage and adjusting for Northern Ireland, there were 227,400 x (1-0.24) ÷ (1-0.017) = 175,813 new born companies which survived to mid 1992. This gives the upper bound for the number of independent births. Since most of these new companies were probably small, we can assume that at most 12.7% were subsidiaries. The lower bound is therefore 153,485.
A3.
The total number of independent deaths 1990-1992
Applying the identity, net change in number of active companies = births - deaths, we can deduce that deaths over 1990-92, using the lower bound figures derived above, were: 153,485 - [724,106 - 748,663] = 178,042.
30
Appendix B: The OneSource Database and the Company Population
Taking the lower bound statistics, Appendix A estimates the population of independent companies (excluding UK subsidiaries of foreign companies) as 748,663 in 1990 and 724,106 in 1992. There were 178,042 deaths of independent companies and 153,485 births so that 570,621 independent companies survived through the twoyear period. The OneSource database is a very large sample of the accounts of these companies. It is not truncated and includes a non-random sample of the very smallest companies down to one employee. But the sampling fraction increases with the size class of company, reaching 100% for the larger size classes. In total, the OneSource sample of companies by employment used here contains 83,573 in 1990, including 21,404 deaths, and 84,028 companies in 1992, including 4,423 births.
How should we estimate the jobs generated in the corporate population from those observed in this sample? The technique used here is based on the assumption that the corporate size distributions in the population are lognormal. The following equation was fitted to the sample distribution above 8, 16 and 32 employees in three separate OLS regressions, dividing the sample frequencies in each size class by the total population to obtain the required relative frequencies:
(B1)
ln ξ q = µ + σνq
where ξ q is a quantile of the observed distribution, νq is the corresponding quantile of the standard normal distribution, and µ and σ are the mean and standard deviation of the logarithms of company sizes. For example, if q = 0.9 so that 90% of the observations are below ξ q , then νq = 1.28.
The linear regressions were then
extrapolated to estimate the numbers of companies in each size class below 8, 16 and 32 employees. In fact the three thresholds gave similar results so the lowest threshold of 8 employees was chosen. The implicit assumption in the extrapolation that the sampling fraction was 100% above 8 employees forces most of the company population into the lower size classes below the threshold, resulting in an extremely skew distribution. 31
To illustrate the effects of this estimation method, let us consider the OneSource sample of 4,423 births, with 3193 above 8 employees, out of a population of 153,485. Equation (B1) yields the result that 98.6% of company births in the population were below 8 employees.
Indeed, 93.1% were in the very lowest size class of one
employee. How does this estimate compare with official data on the population of company births?
A size distribution by issued capital of all company births (independents and subsidiaries) in the population is shown in Table B1. Excluding the 2.8 thousand new companies with authorised but unissued capital, some 91% of company births had issued capital of less than £100, with an average of some £12. Further enquiries at Companies House revealed that about a third of these 102,600 new small companies had issued capital of only £2. No distribution by employment is available but it may be assumed that each of these small companies had a maximum of one employee.
At the top of the distribution, 1,400 or 1.24% of new companies had an issued capital of £10,305.2 million, or over 99% of the total issued capital. The positive skewness is extraordinarily high, even higher than the extremely skew size distributions of the OneSource samples by employment, sales and assets reported in Hart and Oulton (1995, Tables 1.3).
This exceptional skewness in the corporate population presents problems when uprating the OneSource sample distribution of corporate births by employment to the population. The huge number of new companies with only one employee dominates the relationship between size of company and corporate births, yet the translation from a sole proprietorship to a one-employee company does not really generate a new job. It may provide limited liability for the formerly self-employed, though these new company directors probably have to give personal guarantees to banks and other lenders to cover their borrowing. They may also obtain tax advantages from corporate status if their profit is small enough to attract the low small companies corporation tax rate, but large enough to attract the higher personal income tax rate if they remain selfemployed. In either case the switch from self-employed to corporate status by itself 32
does not generate new jobs, even though the statistics of corporate employment increase by the number of one-employee companies.
Table B1 Distribution of companies incorporated in 1993-94 by issued share capital at 31 March 1994 (Great Britain)
Issued share capital (£) 0 1 < 100
No. of companies (thousands) 2.8
Issued capital (£m) 0
102.6
1.3
100 - 999
3.3
0.7
1,000 - 4,999
3.0
3.8
5,000 - 9,999
0.4
2.3
10,000 - 19,999
0.6
7.3
20,000 - 49,999
0.6
18.1
50,000 - 99,999
0.6
37.5
100,000 and over
1.4
10,305.2
115.4
10,376.3
TOTAL
Source: DTI (1995) Companies in 1994-95, Table A1.
33
Appendix C Corporate Mortality
The Companies House CD-ROM described in Appendix A can be used to obtain the total of all actively trading companies in the UK at the end of November 1996. The CD-ROM lists all companies on the register and records whether they were either dormant, dissolved, in liquidation, or in receivership in the 12 months up to endNovember 1996. A company is counted as actively trading if it is not in any of these states.
The date of incorporation enables us to construct an age distribution of all active companies at end-November 1996: see Table C1. The second column gives the cumulative number of companies which survived to end November 1996 and which were incorporated on or before the end of each period. The third column gives the number of still surviving, active companies incorporated in any given time period, at an annual rate. The fourth column shows the proportion of the total number of currently active companies accounted for by companies incorporated in each time period. Chart C1 (which derives from the table) shows the frequency distribution of survivors by age. It can be clearly seen that the number of survivors declines steeply and nearly monotonically with age. In fact, nearly half of all active companies are 5 years old or less.
Nevertheless at the end of 1996 there were still 2,134 active companies which had been incorporated in 1900 or earlier. In fact, there were over 100 companies still surviving from 1870 or earlier.
The counterpart of the survival rate is the death rate. Table C2 shows death rates in the 12 months ending in November 1996 by year of incorporation and by average age within year of incorporation: see also Chart C2. For example, companies incorporated in 1975 which were dissolved in 1996 are assigned an average age of 21, since they were incorporated on average in mid-1975 and were dissolved on average in mid1996. The death rate is defined as the number of companies dissolved divided by the active total, in each age group. As explained in the text, this does not correspond exactly to the theoretical definition of death, namely ceasing to be active, for two 34
reasons. First, a dissolved company may have ceased to be active at some earlier date. But second, an active company may become dormant or be placed in liquidation without immediately being dissolved. The death rate as measured assumes that these two forces balance out.
The death rate of two year old companies is extremely high, 26.8%. Thereafter it falls steadily to about 9% around age 14. The death rate continues to decline with age thereafter but at only a modest rate. The initial rise in the death rate with age, found for companies aged less than 2 years, is to be expected. If a company has just been founded, it must take an exceptional event to cause its death within (say) 6 months. The overall annual death rate was 9.7%, similar to the annual rate in 1990-1992.
35
Table C1 Active companies on the register, end November 1996: by date of incorporation Period
1996 * 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971
Stock of companies Number of companies Number of companies incorporated on or incorporated in each incorporated in each before end of each period period as proportion period of total (number) (annual rate) (%) 1,018,656 153,001 15.0 865,655 134,745 13.2 730,910 82,969 8.1 647,941 59,265 5.8 588,676 46,164 4.5 542,512 40,586 4.0 501,926 37,486 3.7 464,440 37,370 3.7 427,070 35,156 3.5 391,914 33,174 3.3 358,740 29,411 2.9 329,329 24,356 2.4 304,973 21,963 2.2 283,010 20,915 2.1 262,095 19,161 1.9 242,934 24,515 2.4 218,419 13,140 1.3 205,279 12,751 1.3 192,528 13,021 1.3 179,507 11,141 1.1 168,366 10,767 1.1 157,599 8,591 0.8 149,008 7,720 0.8 141,288 10,517 1.0 130,771 8,689 0.9 122,082 6,860 0.7
1966-70
115,222
4,290
2.1
1961-65
93,771
5,761
2.8
1956-60
64,968
3,710
1.8
1951-55
46,419
2,027
1.0 Continued
36
Table C1, continued 1946-50
36,282
2,010
1.0
1941-45
26,233
815
0.4
1936-40
22,156
995
0.5
1931-35
17,183
830
0.4
1921-30
13,034
564
0.6
1911-20
7,399
322
0.3
1901-1910
4,181
205
0.2
1900
2,134
N.A.
0.2
N.A.
N.A.
100.0
TOTAL Source
Companies House, “The CD-ROM directory”, November 1996.
* End of this period is 31 November 1996.
37
Table C2
Year incorporated 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971
Death rates of active companies in 12 months ending November 1996: by date of incorporation and age Average age (years) 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Death rate (%) 0.1 2.0 26.8 17.9 17.5 15.5 14.2 14.4 12.8 11.8 10.9 10.9 9.9 9.6 9.1 5.2 8.6 8.5 7.6 7.9 8.3 7.6 7.9 8.3 8.6 8.7
1966-70
28
7.4
1961-65
33
7.6
1956-60
38
7.2
1951-55
43
7.4
1946-50
48
38
7.2 Continued
Table C2, continued 1941-45
53
6.9
1936-40
58
7.6
1931-35
63
7.7
1921-30
71.5
6.7
1911-20
81.5
5.9
1901-1910
91.5
6.4
TOTAL
N.A.
9.7
Source
Companies House, “The CD-ROM directory”, November 1996.
Note Death rate is number of companies dissolved divided by the number of active companies.
39
Chart C1 Age distribution of active companies in 1996
% of companies
15
10
5
0 10
20
30
40 50 60 Age in years
70
80
90
100
70
80
90
100
Chart C2 Death rates of active companies in 1996
% of active companies
30
20
10
0 2 5 10
20
30
40
50 60 Age (years)
40
