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Peter Urwin and Franz Buscha

Evidence suggests that small firms create more jobs, but they also destroy more, compared to larger firms. However, there is limited information on small–large firm differences in the types of jobs created and the employees who secure these. This study analyses labour market transitions using Labour Force Survey (LFS) data (2005–2011). Our approach to analysis mitigates concern over measurement error, arising from the use of self-reported workplace size as a proxy for firm size. Findings suggest that small firms provide an important pathway to employment for the unemployed and inactive, but employees in small firms also have higher probabilities of returning to unemployment or inactivity. Higher rates of small firm destruction account for some of this, but small firms employ larger numbers of individuals with characteristics that are associated with a higher risk of unemployment or inactivity. Our findings are driven by differences at the extremes of the firm size distribution.