The ‘Big Shrink’ – Massachusetts Firms’ Dramatic Drop in Size

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The ‘Big Shrink’ – Massachusetts Firms’ Dramatic Drop in Size

Pioneer Institute study calls on lawmakers to respond to state’s inability to create jobs

Boston, MA – While the rest of the country experienced 27% net job growth from 1990-2007, Massachusetts lost jobs. In 1990, the average Massachusetts firm employed 16 people. By 2007, average firm size had plummeted to 9.7 employees, a drop of 39%. Over the last decade, the state’s failure to encourage new business formation and the precipitous drop in firm size combined to stymie job creation

The Big Shrink: Declining Establishment Size in Massachusetts

The effect was more dramatic for standalone firms, which account for the vast majority of establishments in the state and account for more employees than headquarters or branches. Large (100+) standalone firms did not increase in number while small (single/non-employer firms) standalone firms increased by 174 percent. The result is a drop in the average size of standalone firms from 8.38 to 5.48 employees.

“Massachusetts lags the rest of the country in job creation” said Northeastern Professor John Friar. “And we can’t catch up if we are creating fewer companies and those companies are shrinking in size.”

The report, The Big Shrink: Declining Establishment Size in Massachusetts, draws on data from the National Establishment Time-Series Database to identify the key drivers of firm size contraction in Massachusetts, reviewing contributions by industry and establishment type (headquarters, branches, and
standalone firms) to determine whether the phenomenon is widespread.

“This report makes clear that the same old approach to economic development won’t work,” said Pioneer Institute Executive Director Jim Stergios. “We need to focus on improving the general business climate. Our narrow focus on ‘sweet spot’ businesses is simply not a proven way to create the number of jobs our citizens need.”

Key findings of the report include:

o Reduction in firm size is widespread, across all industries and most establishment types.
o Average firm size in all industries shrank from 1990 to 2007, except for manufacturing.
o Average size of branch and standalone firms shrank dramatically.
o While the average firm size of headquarters increased, the number of headquarters in Massachusetts has shrunk on both relative and absolute bases.

The increase in the size of Massachusetts headquartered firms does not offset other job losses. The rising number of smaller businesses in Massachusetts shows that increasing jobs will require a dramatic jump in the state’s rate of business creation or a reversal of firm size trends.

Since 2007, Pioneer Institute has released a series of reports on the Massachusetts economy, focusing on the cost of doing business, headquarter loss, volatility in the job base, and firm relocation to help policymakers understand job loss and job growth trends. Since 1991, Massachusetts has lost one third of its corporate headquarters. Since 2001, Massachusetts has lost 300,000 jobs. 98% of the jobs created in Massachusetts come from the growth of businesses already located here.

To learn more about Pioneer’s recent research on job creation and the Massachusetts economy, read the following policy briefs:

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