The extent of overestimation of small firm job creation: an empirical examination of the ‘regression bias’

Davis, Haltiwanger & Schuh (1993; 1996) suggested that the belief that small firms are major contributors of new jobs is largely based on methodological flaws. In particular, their reasoning about the "regression fallacy", i.e., that temporary fluctuations in size systematically biases estimates in favour of small firm job creation, has caught on interest among researchers and concern among policy makers. In this article we attempt to estimate the extent of overestimation of small firm job creation due to the "regression fallacy". It is concluded that the effect is very small and that correcting for it does not lead to qualitative change of the results. There may be good reasons to question to what extent small firms can lead economic development, but concern for the "regression fallacy" does not seem to be an important issue in this context.