Thursday, March 15, 2012

Is US firm size now diminishing?

Choi and Spletzer (2011) ("The declining average size of establishments: evidence and explanations") have shown a declining trend in the average size of US firms and establishments during last decade, after a reverse of trend during 2000/2001 (from 1993 to 2001 the trend was crescent, and also long term trend from 1977).
The declining trend occurs in almost all industries and can be explained by the age of the firms and establishments. They found that new establishments and start ups are smaller: they start small and they stay smaller hen they mature.
Although not driven by a particular industry, the decline in manufacturing size of firms had a substantially larger effect than in other industries.
They advance the hypothesis that new entries (births) adopt new modes of production, more based on technology and less based on labor. Industries more technology intensive really show a more declining trend.
An important point of their paper is the critical role of age cohorts in order to understand the evolution of size of firms along time.

Their figure 6B shows two important things:
- establishments growth along time: initial size was around 7 for entries during 2001, but ten years later their average size was around 14 (a compounded annual rate of growth around 8%)
- establishments start smaller and smaller: average initial size was around 4.7 in 2010, versus around 7 ten years earlier, in 2000.

It is interesting to compare with their figure 6A, size by age, not age cohorts: it shows a declining trend for units of the same age, along time. This means that three years old units were around 12 people in mid 90’s, but less than 8 in 2011. Figure 6A is a consequence of overlapping of different curves from figure 6B.

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