)
Young companies that have been around for five years or less account for the majority of job creation in Australia and add a disproportionately high level of value to the economy, according to a recent report published by Sydney-based think tank e61 Institute.
In its research paper The Young and the Restless: The Contribution of Young Firms to the Economy, the non-partisan research non-profit found that firms aged five years or less - but not in their first year of business - account for 40 per cent of job creation even though they only make up 31 per cent of all companies, and contribute to 45 per cent of value-add creation.
These figures do not include firms in their first year of operation as employers, which the report refers to as 'employing firm births' - a category that only accounts for 5 per cent of Australia's employment but 22 per cent of job creation.
In contrast, 'small old firms' with fewer than 15 employees account for only 15 per cent of job and 28 per cent of value creation, even though this class of business represents half of all firms in the country.
The report's authors Rachel Lee, Ewan Rankin and Lachlan Vass note that small old firms are the largest source of destruction in terms of jobs and value-adding, for example through declines in headcount and value-add as they shrink or exit.
Interestingly, it was also found that exiting firms are roughly 20 per cent less productive than the industry average even five years before they exit, with their eventual exit then reallocating resources towards more productive companies.
"Government policy often supports small businesses - the so-called ‘engine room’ of the economy - through lower taxes, lighter labour regulation, and grants," the report authors wrote in a summary of the report.
"Yet it is actually young firms that play the most outsized role in economic dynamism. Using firm-level microdata, we draw out this important distinction between firm size and age in firms’ economic contribution, highlighting three key facts."
Not all infant firms are made equal however, with the researchers highlighting "vast heterogeneity" of performance.
"By age five, high-performing young firms employ twice the number of workers than the average firm of the same age and are over 40 per cent more productive," they wrote.
"As firms mature, their productivity improves on average. Among those that survive at least five years, productivity of the average firm converges with that of incumbent firms by age five.
"However, this average masks stark differences, and is pulled up by the highest-performing firms. Firms in the 90th percentile begin with productivity 15 per cent above the industry average, which rises to around 45 per cent above the industry average by age five."
Meanwhile, 'large old firms' that are older than five years with 15 or more employees account for around a quarter of jobs created, and like small old firms they are a greater source of value-add destruction than creation, albeit with a much smaller differential.
The contribution to job creation and growth from large old firms fluctuates and can fall negative during downturns, the research found.
"Our findings demonstrate the importance of start-ups to Australia’s economic growth, especially compared to older small businesses," says e61 research manager Lachlan Vass.
"However, fewer new firms are being created and fewer old firms are shutting down, potentially stifling our economic potential."
The top performing young firms see even greater employment and productivity outcomes, highlighting the importance of new firms that bring new ideas and innovations.
But the proportion of employing businesses created in a given year has declined over time from 15.1 per cent of all businesses in 2004-05 to 10.7 per cent in 2024-25.
The research paper argued that governments should stop supporting businesses based on their size with policies such as lower taxes, lighter labour regulation, and grants.
“Our research shows that size alone is a particularly poor indicator of economic potential,” said e61 Institute research economist Rachel Lee.
“Size-based policies risk supporting businesses that are unlikely to contribute meaningfully to future economic growth, while potentially distorting behaviour.
“Reducing policy-induced barriers to exit and supporting transitions for affected workers and entrepreneurs will help ensure resources are reallocated to their most productive use.”
The findings around the contribution of infant firms is consistent with findings overseas.
"To get business taxation and other regulations right, it is important to understand how firms are born, evolve and exit," says UNSW Business School Professor Petr Sedlá?ek.
"By contrast, size-based business regulation has been found to hamper business dynamism."
The e61 Institute was co-founded in March 2021 by University of Chicago professor Greg Kaplan, a Macquarie University graduate, and economist Andrew Charlton who from 2007 to 2010 was chief economic advisor to then-Prime Minister Kevin Rudd, followed by the founding of his own consultancy AlphaBeta which was acquired by Accenture in 2020.
In May 2022 Charlton was elected as Federal Member of Parramatta for the Labor party, at which time he resigned as a director of e61 where he has ceased all executive involvement in line with the think tank's non-partisanship commitment to use data-driven economic research that can strengthen policy-making.
)
