I. Introduction

Theory identifies alternative channels via which uncertainty can affect firms’ decisions related to capital investment outlays, entry, exit, production, R&D expenditures and choice of technology. While the literature is quite diverse and expansive, three broad classes of theories have come to dominate the discussion. These include: real-options, where the sunk cost component of expenditures can adversely affect input and production decisions under uncertainty; information-asymmetry between lenders and borrowers which, under greater uncertainty, are likely to affect the flow of credit to specific categories of businesses and influence their choices of inputs and production; and attitudes towards risk, with greater risk-aversion having the potential to affect a range of decisions. Regarding uncertainty itself, the literature has examined uncertainty arising from a wide range underlying factors such as demand, prices, input costs, cashflow, project returns, technological factors, regulatory and economic policy changes. As we discuss in the next section, the alternative theoretical channels and underlying sources of uncertainty often predict similar qualitative effects. In our review of the empirical evidence, we present an extensive survey of the literature to highlight the findings on the effects of uncertainty on decisions related to inputs, entry and exit, inventories, technology and production.

While there is a significant literature in economics, strategic management and entrepreneurship that has examined the impact of uncertainty on various aspects of firms’ decisions, we are not aware of any study that has formally examined the effect on employment. In an influential contribution, Bloom, Bond and van Reenen (2007) note that: “… while we do not model the behavior of labor demand, the existence of labor hiring and firing costs would imply that higher uncertainty would also make employment responses to demand shocks more cautious…” A key component of the real-options models, for example, is that the expenditures incurred have a sunk cost component. In this dimension, there is an extensive literature in labor economics that has theoretically modeled and empirically examined costs related to hiring and terminating workers. This literature notes that these employment decisions entail variable and fixed costs, some of which are sunk. Examining the link between uncertainty and employment dynamics fits well into the broader literature on uncertainty, and addresses an important aspect that has not been studied in detail.

In addition, examining the effects of uncertainty on employment has taken on a prominent role following the 2008 economic crisis, where employment effects have taken center stage in policy debates on how to improve economic conditions. Leduc and Liu (2012), addressing policy issues, note that in the 2008 financial crisis, greater uncertainty has reduced employment and increased the unemployment rate, and the relative ineffectiveness of the standard monetary policy measures to alleviate this problem. Mishkin (2011) notes that the increase in uncertainty during the financial crisis lead to an increase in asymmetric information, which hindered the ability of financial markets to allocate funds to businesses, affecting a range of their decisions. He notes alternative policies that may equilibrate the markets. Denis and Kannan (2013) find that greater uncertainty significantly affects economic activity, depressing industrial production, GDP and employment. The Economist (2013) noted that heightened uncertainty lowers employment, as firms hold off hiring new workers. Given this, more systematic evidence on the impact of uncertainty on employment would help us better understand the underlying nature of firms’ decisions and inform economic policy making.

Our specific focus is to examine the potentially differential effects of uncertainty on employment in larger versus smaller businesses. As we note in the next section, the information-asymmetries driven financing-constraints models suggest that the effects of uncertainty are more likely to be concentrated in the smaller businesses. While there is some evidence regarding the effects of uncertainty on larger versus smaller businesses in terms of capital investments, there are no studies related to employment dynamics.

Apart from relevance to some of the underlying theories, there are broader reasons to focus on smaller versus larger businesses. First, small businesses play an important role in the economy in several dimensions. According to the U.S. Small Business Administration (henceforth, SBA), small businesses represent about 99 percent of all employer firms, and employ about one-half of all private sector employees. Small businesses pay about 43 percent of total U.S. private payroll and have generated 65 percent of net new jobs over the past 18 years. Small businesses create more than half of the non-farm private GDP, made up 97 percent of all identified exporters and produced 31 percent of export value in 2008. Small businesses are also important to technology improvement. According to the SBA, small businesses hire over 40 percent of high tech workers (scientists, engineers, computer programmers, and others). Small businesses generate patents more efficiently than large firms: they produce 16 times more patents per employee than large patenting firms. Irrespective of the specific dimension under consideration, small businesses clearly play a vital role in the economy.

Overall, our examination of the effects of uncertainty on employment dynamics, and the potential differences between the smaller versus larger firms, contributes to the growing literature on understanding the wide-ranging effects of uncertainty. To the extent that uncertainty may significantly matter in influencing employment dynamics, and the potential differences between smaller versus larger firms, our findings would be of relevance to policy.

The paper is organized as follows. In Section II we note some of the key theoretical results relevant to our analysis and present the hypotheses. Section III presents a brief overview of the empirical literature. Data sources and variables are discussed in Section IV, and in section 5 we outline the construction of our measures of uncertainty. Sections VI and VII develop the empirical specification we estimate, and present the results. Our main findings are that uncertainty negatively affects the growth of employment and this impact appears to be concentrated primarily in the relatively smaller business category. The impact on the large business category is typically non-existent. Section VIII concludes with a discussion of our findings and some economic policy issues.

II. Theoretical Considerations

In this section we discuss some of the main theoretical models related to real-options, information-asymmetry driven financial constraints, and risk-preferences, and note the results useful for our empirical analysis.

III. Empirical Evidence

The empirical literature examining the effects of uncertainty is quite extensive and it is difficult and space-consuming to review the full spectrum of estimation results. To offer a perspective in a convenient format, we present a table in Appendix A which summarizes a wide range of papers. The list is not meant to be comprehensive, but display the range of variables that have used to measure uncertainty (e.g., GDP, inflation rate, prices, input costs, energy prices, stock indices, among others), the specific statistical constructs used to capture uncertainty (e.g., unconditional variance, conditional variance derived from forecasting regressions, survey measures), the level of aggregation of the studies (firm or industry level, and macroeconomic), and estimated qualitative and quantitative effects. In addition, this literature has examined the effects of uncertainty on a wide range of decision variables, such as production, investment, R&D, inventories, entry and exit, plant openings and closings, among others. To conserve space, we do not repeat the range of findings here. The papers noted in the appendix summary table shed light on these.

A key issue in our analysis relates to potential differences between the relatively smaller and larger businesses. Below we briefly comment on selected papers in the literature that provide insights in this dimension.

On the potential differences on the effects of uncertainty on relatively small and large firms, most of the information comes from estimating the impact of uncertainty on investment. Using industry-level data, Ghosal and Loungani (2000) find that uncertainty negatively affects investment spending, and the negative impact is greater in industries dominated by smaller firms. Lensink and others (2005) find that uncertainty has a negative impact on the size of investment, no matter what the type of investment is used, and that smaller firms have a lower probability of investing if uncertainty increases. Ghosal (1991) finds that uncertainty negatively affects firms’ input-mix as measured by the capital-labor ratio, and that larger firms’ input-mix appears less affected by uncertainty. Bianco and others (2012) find that small family firms’ investments are significantly more negatively affected by uncertainty than the relatively larger and less financially constrained non-family firms. Findings in Ghosal and Loungani (1996) reveal that uncertainty has a negative impact on investment, and the effect appears to be concentrated in those industries that are relatively competitive and atomistic in structure. Examining smaller entrepreneurial businesses, Li (2008) finds that market uncertainty encourages venture capital firms to delay investing, whereas competition and agency concerns prompt venture capital firms to invest sooner. Using data on venture capital investments, Li and Mahoney (2011) find that venture capitalists tend to defer new investment projects in target industries with substantial market volatility. Their examination of the effects of uncertainty on venture capital funding is important as smaller entrepreneurial businesses are often highly credit constrained from traditional sources, and have to rely on own cash-flows or venture funding (Baldwin, Gellatly and Gaudreault, 2002).

Overall, these studies appear to indicate that uncertainty may differentially affect the relatively smaller and larger firms. While these studies do not shed clear light on the underlying factors that cause the effect to be different, some of the results noted above appear to suggest that information-asymmetries related financing-constraints may be an important influence.

IV. Data Description

For our empirical analysis, we use data from multiple sources. Below we provide details of the datasets we use.

First, is the U.S. Small Business Administration (henceforth, SBA) database. This database contains annual data on various economic and business variables by ‘size of businesses’ typically over the period 1988 to 2011. The data are not at the firm-or-industry level, but aggregated and then presented by alternative size classes. For example, the data on employment are available as an aggregated annual time-series for all businesses in the U.S. over 1988-2011. The aggregate employment data are then presented by firm size classes, where, based on standard U.S. Census classifications, size is based on the number of employees. For example, annual time-series data are available for employment in business with more than 500 employees, and other size classes. We discuss some of the size classes below. While the SBA data are not designed to examine firm-or-industry-specific issues, they are very useful in gauging an economy-wide picture and with a focus on firm size. For our study, the SBA data allow us to examine how uncertainty may affect employment and by different firm-size classes. From the SBA database we use annual data on employment by the size of businesses. Data by business size classification are not available prior to 1988.

Second, we use several U.S. macroeconomic data series. Data on real GDP and GDP implicit price deflator are from the Federal Reserve Economic Data. The data on S&P 500 stock price index are from Yahoo Finance. And data on fuel price index are from the U.S. Bureau of Labor Statistics (BLS); the fuel price index contains information on a broad range of the most commonly used fuels by producers, such as gasoline, electricity, natural gas, heating oil, among others.

Next we use the following size classifications to examine the potential smaller versus larger business effects:

• 1. ‘All’ businesses;

• 2. ‘Large’ businesses – these are businesses with ≥500 employees;

• 3. ‘Small’ businesses – these are businesses with <500 employees; and

• 4. ‘Smaller’ businesses – these are businesses with <20 employees.

The 500 employee cutoff is the standard one used by the U.S. SBA, and we use this as the baseline. We consider an additional cutoff of <20 employees for the following reasons: (a) a 500 employee firm is relatively large, so we wanted to consider an alternate cutoff for defining small; (b) data with the <20 employee cutoff was available consistently for both our variables (employment and number of businesses); and (c) a large percentage of the truly small business fall in this category.

In our estimation of employment specifications, we present estimates for each of the four groupings (1-4) noted above. In Figures 4 we display the time paths for the growth of employment by our size classes. Table 1 presents the summary statistics.

V. Measuring Uncertainty

The review of theory in Section 2 noted that uncertainty about future payoffs could arise from a wide range of factors related to demand (Dixit, 1989; Dixit and Pindyck, 1994), input costs (Pindyck, 1993), and project related technical factors (Pindyck, 1993). Pindyck (1993) and Dixit and Pindyck (1993, 1994) also note other factors that may generate uncertainty, such as regulatory and policy interventions.

Our data are U.S.-wide and include all relatively smaller and larger businesses. Since the data and analysis are designed to portray a broader macroeconomic picture, our alternative measures of uncertainty are also created using macroeconomic indicators. Some of our measures are designed to capture overall uncertainty about macroeconomic conditions, whereas other measures are designed to capture uncertainty arising from the cost side. Further, we noted in Section 3, various papers in the literature have used a range of variables to measure uncertainty (GDP, inflation, prices, energy prices, stock prices, survey opinions, among others), and the specific statistical constructs to capture uncertainty (unconditional variance, conditional variance derived from regression estimates, survey forecast variance). Appendix A summarized some of the studies in a compact form. This expansive literature reveals a wide range of variables and methods to measure uncertainty. In the spirit of this broader literature, we use two alternative conceptual frameworks and six different variables to measure uncertainty. As we note below, our specific measures are consistent with those that have been used in the literature before.⁶

First, we use the forecasts from the Survey of Professional Forecasters (henceforth, SPF) provided by the Federal Reserve Bank of Philadelphia. These survey forecasts have been widely used in economic and business analysis, and in academic and policy arenas. The SPF asks professional forecasters to provide their forecast for key macroeconomic variables, including GDP growth, industrial production, inflation, and unemployment, among others. The forecasters provide quarterly and annual forecasts for the current year and the following year. The respondents are asked to attach a probability to each of a number of pre-assigned intervals over which their forecast may fall. The Philadelphia Fed then takes the mean probabilities over the individual respondents and reports them in the SPF release in the form of a histogram. From the Philadelphia Fed survey data we use forecasts for growth of GDP and industrial production to construct two measures of uncertainty. We use GDP growth as it is the broadest measure of economic activity. We use growth of industrial production as an alternative measure as it is the most cyclical component of the economy, and is used by many forecasters as a leading indicator of macroeconomic conditions. Our measures of uncertainty are constructed as the within-year variance of survey forecasts for growth of GDP and industrial production. This procedure is common in the literature: see for example the discussion in Lensink, Bo and Sterken (2001, p. 104-105). Our two survey-based measures of uncertainty are labeled as ${\sigma }_{spfgdp,t}^2$ and ${\sigma }_{spfind,t}^2$, with spf denoting ‘survey of professional forecasters’.⁷ Both these measures indicate the uncertainty about macroeconomic conditions.

Second, we use a regression-based forecasting framework to construct alternative measures of macroeconomic uncertainty. We use the following procedure. First, we assume that the representative firm uses a forecasting specification to predict future values of the relevant variable, such as GDP growth, inflation rate, growth of fuel prices and growth of S&P 500 stock index. Since our SBA data on businesses are U.S.-wide, our uncertainty measures are also created using economy-wide variables. Second, from the estimated forecasting specification, the predicted values represent the forecastable component and the residuals the unpredictable, or unforecastable, component. The variance of the forecast error (the unpredictable component) measures uncertainty. Using the residuals from forecasting equations and using the conditional-variance to construct uncertainty measures is common. Lensink, Bo and Sterken (2001, p.99-105), for example, present an excellent overview of this literature and alternative frameworks that have been used in the literature for measuring uncertainty.

To estimate the forecasting specification for the macroeconomic variables, we use available data on each variable from 1960 to 2011. The BLS fuel price indices are only available starting 1960. Given this we use 1960 as the starting year for which all of our macroeconomic variables. The terminal period is 2011, which is the same as the last period for which the U.S. SBA data were available when we started the paper. Even though the SBA data on the small and large business categories are available for the period 1988-2011, the rationale for using a longer time period to estimate the forecasting equation is as follows. An important objective is to first obtain a reliable forecasting equation with precisely estimated parameters. This is better done with a longer time-series data. This ensures that the forecasting errors we recover are not an artifact of poorly estimated forecasting equation parameters, and therefore generates better measures of uncertainty. As noted in Lensink and others (2001), and several of the papers in the table presented in the Appendix, this framework is common. Even in the more advanced classes of time-series forecasting models, such as ARCH and GARCH which are used typically when higher frequency and longer time series are available, the core forecasting regression is estimated over a long time period, and then the errors are recovered to model uncertainty.

Based on these considerations, our approach below is consistent with several papers in the literature, and presents an alternative framework for measuring uncertainty. Next, we turn to discussing the specific variables and constructing the measures of uncertainty.

The specific variables we use to construct the measures of uncertainty are consistent with those in the literature. They are:

• 1. Real GDP growth. GDP indicates the overall state of the economy capturing demand and supply side effects. This measure therefore captures uncertainty about economy-wide conditions. Uncertainty measures based on GDP growth, in different forms, have been used by, for example, Driver and others (2005), Asteriou and others (2005) and Bloom (2009);

• 2. Inflation rate. We measure inflation as the annual percentage growth of the GDP deflator. Inflation uncertainty captures effects related to input and product prices, as well as affecting firms’ real borrowing rates. Inflation uncertainty, therefore, primarily captures uncertainty arising from the cost side. The inflation rate has been used to construct measures of uncertainty by, for example, Huizinga (1993), Fountas and others (2006) and Elder (2004);

• 3. Stock prices. We use the S&P500 stock price index. As with real GDP, this is an indicator of the overall state of the economy, and forward looking indicator of investor and business confidence. This captures broader uncertainty about market conditions. Stock prices have been used to construct measures of uncertainty by, for example, Bloom (2009), Chen and others (2011), Bloom and others (2007), Greasley and others (2006), and Stein and others (2010); and

• 4. Real fuel price growth. We use the Bureau of Labor Statistics price index of a range of commonly used fuels by businesses. The nominal fuel price index is converted to real values after deflating by the implicit GDP deflator. This variable serves to proxy a critical input – fuels and energy – price for businesses. Fuel price uncertainty captures uncertainty arising from the input-cost side. Fuel and energy prices have been used to construct uncertainty measures by, for example, Koetse and others (2006), Kilian (2008) and Guo and others (2005).

Our first task is to specify the forecasting model. As our baseline, we use a second-order autoregressive, AR(2), specification as the forecasting model. AR(n) models are based on the Box and Jenkins (1970) formulation for forecasting economic variables, and historically have performed well in forecasting exercises (Meese and Geweke, 1984; Marcellino, Stock and Watson, 2003).

The forecasting specification is:

Based on the discussion above, Z is either real GDP growth, or inflation rate, or growth of S&P500 stock index, or growth of real fuel prices. From specification (1), the predicted values represent the forecastable component. The residuals:

represent the unsystematic, or unforecastable, component. Since ${\hat{\epsilon }}_t$ can be positive or negative, we use the squared value of ${\hat{\epsilon }}_t$ as our measure of uncertainty about the relevant variable. If the forecasting specification (1) is estimated for real GDP growth, then we denote the uncertainty measure as:⁸

Using this procedure for our four economy-wide variables, we obtain four measures of uncertainty and denote them as: (i) ${\sigma }_{gdp,t}^2$; (ii) ${\sigma }_{infl,t}^2$ (iii) ${\sigma }_{sp500,t}^2$ (iv) ${\sigma }_{fuel,t}^2$ As we noted above, our forecasting specifications are estimated using data over a longer period 1960–2011, designed to obtain precisely estimated parameters of the forecasting equation from which we recover the residuals. This implies that the generated time-series for our four measures of uncertainty ${\sigma }_{gdp,t}^2,{\sigma }_{infl,t}^2,{\sigma }_{sp500,t}^2$ and ${\sigma }_{fuel,t}^2$ are over the period 1962–2011. As we note in the next section, in the actual estimation of the effects of uncertainty we will use data on these variables only over the period 1988–2011 as the SBA data on employment by the size categories is over 1988–2011.

While we report our baseline results using an AR(2) specification for (1), our results are robust to including longer lag lengths and alternative specifications of the forecasting equation (1). We comment on these experiments in Section VII.

Our overall approach to measuring uncertainty is consistent with the literature and automatically builds in some checks of robustness. For example:

• (1) We are using two very different conceptual approaches to construct the measures of uncertainty. First, are measures based on professional survey forecasts. Second, using the Box-Jenkins regression-based forecasting specifications and using the variance of the unpredictable component as a measure of uncertainty. As noted in Lensink and others (2001), and several of the range of references above, these methods are consistent with those in the literature; and

• (2) We use alternative variables to measure economy-wide uncertainty. These include GDP, inflation, industry production, fuel prices and stock market index. As noted in the references above, each of these variables have been used in the literature.

Collectively the above framework implies that our inferences are not dependent on a specific conceptual approach or variable used to measure uncertainty.

Table 1 presents the summary statistics for the six alternative measures of uncertainty, and Table 2 presents the correlation between the alternative measures. From Table 2 we note that for GDP growth, the correlation between the professional forecasters’ survey-based measure of uncertainty and the forecasting-regression based measure is 0.75. This is somewhat reassuring that even though the underlying data and procedures to construct the measure of GDP uncertainty vary considerably, there is reasonable correlation between the two.

VI. Estimating the Effects of Uncertainty

There is a substantial literature on estimation of dynamic specifications related to firms’ decision variables, such as investments in physical capital, employment, inventory holdings, among others. Holt and others (1960), Sargent (1978), Kennan (1979), Hendry and others (1983) and Jorgenson (1986), for example, present expositions of the underlying firms’ optimization theory behind the econometric models. Following this literature, we use a partial-adjustment framework to structure our empirical specification. The partial-adjustment model is based on a quadratic cost-minimizing framework where firms, when making their optimal adjustment decisions related to employment or investment, aim to minimize disequilibrium and adjustment costs. The underlying models are framed in terms of a ‘representative’ firm, and then applied to firm, industry or macroeconomic data.

The disequilibrium costs in these models arise due to lost revenue (and profits) from having the relevant decision variable at a sub-optimal level. For example, delayed employment or investment can lead to lost revenues and profits. The adjustment costs are incurred when the firm attempts to align the actual quantity of the decision variable to its optimal level. A firm’s attempt to rapidly align its employment will result in higher adjustment costs. While higher disequilibrium costs motivate firms to adjust employment or investment faster, higher adjustment costs call for a smoother, slower, adjustment process. The actual speed of adjustment of a decision variable like employment will be the weighted-average of the two countervailing effects.

Let EMP denote employment. The partial adjustment model for a representative firm is given by:⁹

where t denotes time, EMP* the optimal value of EMP, and λ the speed-of-response parameter. In (4), the actual employment adjustment (EMP_t—EMP_t−1) is a fraction λ of the ‘desired’ intertemporal adjustment (EMP*_t – EMP_t−1). High (low) values of λ imply high (low) speed-of-response.

Since EMP* is private information and not observed directly by the external researcher, it is modeled as a function of relevant driving variables. The optimal EMP* is modeled as a function of: (i) its own intertemporal dynamics (captured by lagged values, the autoregressive component), (ii) uncertainty, and (iii) expectations of macroeconomic conditions as measured by expected GDP growth, $GD{P}_t^e$; if expected economic conditions improve, firms will plan to adjust their employment upwards. If GDP follows an autoregressive process of order n, AR(n), then $GD{P}_t^e$ can be replaced by its forecasting equation (k represents the optimal lag length):

Combining the GDP and uncertainty measures, and suppressing the autoregressive component for convenience, we have $EM{P}_t^{*}=f(GD{P}_t^e,{\sigma }_{\left[\mathbf{.}\right],t}^2)$, where ${\sigma }_{[\mathbf{.}],t}^2$ is a measure of uncertainty (Section V). Using the expression for $GD{P}_t^e$ from (5) and our uncertainty measure ${\sigma }_{[\mathbf{.}],t}^2$ we get (omitting the constant and error terms for convenience):

where k and m are the appropriate lag lengths.

Using (6) in (4) and rearranging the terms, the partial-adjustment model for a representative firm is:

Where EṀP_t is growth of employment,¹⁰GḊP_t is real GDP growth, ${\sigma }_{[-],t}^2$ is the measure of uncertainty measured in natural logarithms,¹¹v_t is the error term, and (L) represents the lagged operator (we discuss the optimal lag lengths below). As noted in Section V, the six alternative measures of uncertainty we use are ${\sigma }_{spfgdp,t}^2,{\sigma }_{spfind,t}^2,{\sigma }_{gdp,t}^2,{\sigma }_{infl,t}^2,{\sigma }_{sp500,t}^2$ and ${\sigma }_{fuel,t}^2$. Our experiments with lag lengths indicated: (i) for the majority of specifications only one autoregressive lag of EṀP_t was significant, but in a few specifications two lags were significant; (ii) GḊP_t effects were captured by current and one lag; and (iii) at most one lag of the uncertainty variable ${\sigma }_{[-],t}^2$ was significant.

As noted in Section IV, the available data from the U.S. Small Business Administration are annual and cover the period 1988-2011. Therefore we estimate specification (7) over 1988-2011.¹² Estimating (7) informs us about the impact of uncertainty on changes in employment, after controlling for changes in overall economic activity (GDP growth) and the dynamic intertemporal lagged structure for the included variables.¹³

As noted above, specification (7) is for the representative firm. In our examination of the effects of uncertainty on changes in employment, we present estimates for all businesses in the U.S. economy, as well as those segmented by the size of the business. In doing so, we are first assuming that the representative firm is similar for the entire economy and present the aggregated result. Second, we consider that the firms vary in characteristics, and the specific characteristic we focus on is firm size. Here, the representative firm is alternatively large or small and we estimate (7) for the aggregated large versus small groups. Overall, we estimate (7) for four aggregated groups noted in the data Section IV: (1) All businesses; (2) Large businesses (≥500 employees); (3) Small businesses (businesses with <500 employees); and (4) Smaller businesses (<20 employees).

VII. Estimation Results

Our estimates and related computations are presented in the following sequence. First, in Tables 3.1 and 3.2 we present the estimates from specification (7); these tables inform us of the statistical significance of the effects and the qualitative inferences. Second, due to considerable differences in the mean values of variables in the estimated regressions, it is difficult to assess the ‘quantitative magnitude’ of the effects of uncertainty from the estimates presented in Tables 3.1 and 3.2. The computation of the quantitative effects are presented in Tables 4.1 and 4.2; these are calculated as the effect of a one-standard-deviation increase in uncertainty on the growth of employment. Third, to show the quantitative effects computations in a compact form, Table 5 presents the total quantitative effects – these numbers are systematized and aggregated from those in Tables 4.1 and 4.2, and present a clear picture of the quantitative effects of uncertainty, as well as the relative effects of uncertainty versus GDP growth.

VIII. Discussion of Results and Implications

Our paper provides the first set of results in the literature on the differential effects of uncertainty on employment growth, and how this effect varies across firm size classes. Our findings on the differential effects of uncertainty on the employment dynamics of the smaller versus larger businesses are quite robust across alternative procedures for constructing the measures of uncertainty (survey of professional forecasters versus forecasting regression based methods), and alternative variables to measure uncertainty about (GDP, industrial production, inflation, S&P500 and fuel prices). Our results related to uncertainty are robust to controlling for GDP growth and the lagged dynamics of the included variables.

The literature notes a rough equivalence between small businesses and entrepreneurship.¹⁴ Given the role of entrepreneurship in generating new firms, technologies and employment, our results on the effects of uncertainty on small businesses, therefore, also sheds light on the potentially adverse effects on entrepreneurial ventures.

The spirit of our results are not in isolation. Earlier studies on uncertainty, related to estimating the effects on investment spending, and using very different datasets and estimation procedures, have found similar results related to firm size: for example, Bianco and others (2012), Ghosal and Loungani (1996, 2000), Ghosal (1991), Koetse and Vlist (2006) and Lensink and others (2005). This is reassuring as it points to our results not being an artifact of our specific dataset, methods of estimation, or construction of uncertainty variables.

We used the insights from the theories related to real-options, information-asymmetry generated financing-constraints, and risk-preferences to obtain our predictions. As we noted in Section II, the real-options and risk-preference based theories do not offer clear predictions on why small and large firms may differ in their responses to uncertainty.¹⁵ The asymmetric-information related financing-constraints theory on the other hand offered clear predictions, with smaller firms being the ones most likely to be adversely affected by uncertainty due to their greater likelihood of being financing constrained.¹⁶

A limitation of our study is the use of the U.S. Small Business Administration data which are aggregate. First, this makes it difficult to clearly disentangle which of the underlying theories may be playing the more dominant role. It is likely that both the real-options and financing-constraints channels are important in determining the outcomes, with somewhat greater support for the financing-constraints channel due to the more direct predictions. Second, we cannot identify firms which change size class. For example, it might happen that there are small firms according to our definition who grow so that they are recorded as large firms in a future period. This implies that the employment growth may not be attributed to the correct firm size class, and the estimated coefficients may not precisely reflect the effect of uncertainty on employment growth. A fruitful extension of our study would be to address these issues using firm level data.

To the question as to why governments might pay special attention to small businesses, there are several responses. First, we noted that a large fraction of employment and businesses fall into the smaller categories. Second, a number of emerging structural factors – such as those related to globalization and banking sector consolidation – are likely to favor large businesses relative to the smaller ones. These considerations alone provide important economic policy justification.

If it is true that our results on the effects of uncertainty on employment dynamics in important part are being driven by the financing-constraints channel, then potential policy implications emerge. They are primarily in the form of initiatives and instruments designed to partly alleviate financing-constraints faced by smaller businesses. As with many governments worldwide, the U.S. recently implemented policies and programs to help small businesses bridge the capital and market gap and encouraged public-private partnerships to support small business and entrepreneurship by, for example: (a) supporting more than $53 billion in SBA loan guarantees to more than 113,000 small businesses; (b) awarding more than $221 billion in Federal contracts to small businesses (FY 2009 through April 30, 2011); and (c) awarding more than $4.5 billion in research funding through the Small Business Innovation and Research Program during FY 2009 and FY 2010.¹⁷

Such initiatives, along with appropriate lending policies, can help ease some of the financing-constraints faced by smaller businesses in times of economic and financial distress.¹⁸ By doing so, and in the context of this paper, such policies may also help alleviate some of the negative impact of uncertainty on smaller businesses.

In terms of extensions of this line of research, it would be fruitful to conduct more detailed analysis using firm or industry level data. Firm or industry level data may allow us to better test the predictions from these models, and help us disentangle the likely effects of the information-asymmetry versus real-options channels. In addition, use of such data could allow us to examine the role played by structural characteristics of industries, such as R&D and innovation intensity and other characteristics, in determining the effects of uncertainty.¹⁹

Table 1.

Summary Statistics

Notes:

¹1. C.V. denotes coefficient of variation (percent).

²2. The uncertainty variables are:

• (a) Survey of Professional Forecasters (SPF) uncertainty measures ${\sigma }_{spfgdp,t}^2$ = survey of professional forecasters variance of GDP

  • ${\sigma }_{spfind,t}^2$ = survey of professional forecasters variance of industrial (manufacturing) production

• (b) Forecasting-regression generated uncertainty measures ${\sigma }_{gdp,t}^2$ = GDP uncertainty

  • ${\sigma }_{infl,t}^2$ = inflation uncertainty

  • ${\sigma }_{SP500,t}^2$ = S&P 500 uncertainty

  • ${\sigma }_{fuel,t}^2$ = fuel price uncertainty

Table 1.

Summary Statistics

Variable	Mean	Std. Dev.	C.V.
1. Growth of Employment
EMP Size: All	0.01103	0.02258	204.7
EMP Size: Large w ≥500 employees	0.01615	0.02537	157.1
EMP Size: Small w <500 employees	0.00626	0.02158	344.7
EMP Size: Small w <20 employees	0.00527	0.01281	243.1
2. Growth of Real GDP	0.02550	0.01814	71.1
3. Uncertainty Measures
${\sigma }_{spfgdp,t}^2$	0.17861	0.25266	141.4
${\sigma }_{spfind,t}^2$	0.51206	0.73873	144.2
${\sigma }_{gdp,t}^2$	0.00027	0.00052	192.6
${\sigma }_{infl,t}^2$	0.00003	0.00005	166.7
${\sigma }_{SP500,t}^2$	0.01836	0.01920	104.6
${\sigma }_{fuel,t}^2$	0.00842	0.01281	152.1

Notes:

¹1. C.V. denotes coefficient of variation (percent).

²2. The uncertainty variables are:

• (a) Survey of Professional Forecasters (SPF) uncertainty measures ${\sigma }_{spfgdp,t}^2$ = survey of professional forecasters variance of GDP

  • ${\sigma }_{spfind,t}^2$ = survey of professional forecasters variance of industrial (manufacturing) production

• (b) Forecasting-regression generated uncertainty measures ${\sigma }_{gdp,t}^2$ = GDP uncertainty

  • ${\sigma }_{infl,t}^2$ = inflation uncertainty

  • ${\sigma }_{SP500,t}^2$ = S&P 500 uncertainty

  • ${\sigma }_{fuel,t}^2$ = fuel price uncertainty

View Table

Table 1.

Summary Statistics

Variable	Mean	Std. Dev.	C.V.
1. Growth of Employment
EMP Size: All	0.01103	0.02258	204.7
EMP Size: Large w ≥500 employees	0.01615	0.02537	157.1
EMP Size: Small w <500 employees	0.00626	0.02158	344.7
EMP Size: Small w <20 employees	0.00527	0.01281	243.1
2. Growth of Real GDP	0.02550	0.01814	71.1
3. Uncertainty Measures
${\sigma }_{spfgdp,t}^2$	0.17861	0.25266	141.4
${\sigma }_{spfind,t}^2$	0.51206	0.73873	144.2
${\sigma }_{gdp,t}^2$	0.00027	0.00052	192.6
${\sigma }_{infl,t}^2$	0.00003	0.00005	166.7
${\sigma }_{SP500,t}^2$	0.01836	0.01920	104.6
${\sigma }_{fuel,t}^2$	0.00842	0.01281	152.1

Notes:

¹1. C.V. denotes coefficient of variation (percent).

²2. The uncertainty variables are:

• (a) Survey of Professional Forecasters (SPF) uncertainty measures ${\sigma }_{spfgdp,t}^2$ = survey of professional forecasters variance of GDP

  • ${\sigma }_{spfind,t}^2$ = survey of professional forecasters variance of industrial (manufacturing) production

• (b) Forecasting-regression generated uncertainty measures ${\sigma }_{gdp,t}^2$ = GDP uncertainty

  • ${\sigma }_{infl,t}^2$ = inflation uncertainty

  • ${\sigma }_{SP500,t}^2$ = S&P 500 uncertainty

  • ${\sigma }_{fuel,t}^2$ = fuel price uncertainty

Table 2.

Pearson Correlation Coefficients Uncertainty Measures

Notes: The p-values are reported in parentheses.

Table 2.

Pearson Correlation Coefficients Uncertainty Measures

	${\sigma }_{spfgdp,t}^2$	${\sigma }_{spfind,t}^2$	${\sigma }_{gdp,t}^2$	${\sigma }_{infl,t}^2$	${\sigma }_{SP500,t}^2$	${\sigma }_{fuel,t}^2$
${\sigma }_{spfgdp,t}^2$	1.0000	0.6543 (0.001)	0.7510 (0.001)	0.4144 (0.044)	0.4083 (0.048)	0.4381 (0.032)
${\sigma }_{spfind,t}^2$	0.6543 (0.001)	1.0000	0.7772 (0.001)	0.6002 (0.002)	0.4559 (0.025)	0.6358 (0.001)
${\sigma }_{gdp,t}^2$	0.7510 (0.001)	0.7772 (0.001)	1.0000	0.6941 (0.001)	0.5501 (0.005)	0.6934 (0.001)
${\sigma }_{infl,t}^2$	0.4144 (0.044)	0.6002 (0.002)	0.6941 (0.001)	1.00000	0.4047 (0.050)	0.6288 (0.001)
${\sigma }_{SP500,t}^2$	0.4083 (0.048)	0.4559 (0.025)	0.5501 (0.005)	0.4047 (0.050)	1.0000	0.3688 (0.076)
${\sigma }_{fuel,t}^2$	0.4381 (0.032)	0.6358 (0.001)	0.6934 (0.0002)	0.6288 (0.001)	0.3688 (0.076)	1.0000

Notes: The p-values are reported in parentheses.

View Table

Table 2.

Pearson Correlation Coefficients Uncertainty Measures

	${\sigma }_{spfgdp,t}^2$	${\sigma }_{spfind,t}^2$	${\sigma }_{gdp,t}^2$	${\sigma }_{infl,t}^2$	${\sigma }_{SP500,t}^2$	${\sigma }_{fuel,t}^2$
${\sigma }_{spfgdp,t}^2$	1.0000	0.6543 (0.001)	0.7510 (0.001)	0.4144 (0.044)	0.4083 (0.048)	0.4381 (0.032)
${\sigma }_{spfind,t}^2$	0.6543 (0.001)	1.0000	0.7772 (0.001)	0.6002 (0.002)	0.4559 (0.025)	0.6358 (0.001)
${\sigma }_{gdp,t}^2$	0.7510 (0.001)	0.7772 (0.001)	1.0000	0.6941 (0.001)	0.5501 (0.005)	0.6934 (0.001)
${\sigma }_{infl,t}^2$	0.4144 (0.044)	0.6002 (0.002)	0.6941 (0.001)	1.00000	0.4047 (0.050)	0.6288 (0.001)
${\sigma }_{SP500,t}^2$	0.4083 (0.048)	0.4559 (0.025)	0.5501 (0.005)	0.4047 (0.050)	1.0000	0.3688 (0.076)
${\sigma }_{fuel,t}^2$	0.4381 (0.032)	0.6358 (0.001)	0.6934 (0.0002)	0.6288 (0.001)	0.3688 (0.076)	1.0000

Notes: The p-values are reported in parentheses.

Table 3.1.

Growth of employment specifications. Dependent Variable: EMP_t

Notes:

^1.p-values (two-tailed test) based on efficient standard errors are reported in parentheses. An * denotes significance at least at the 10% level. All specifications are estimated using annual observations over the period 1988–2011 (data details are presented in section 4).

^2.The first-order autocorrelation coefficient is denoted by ρ.

^3.The variable definitions are as follows.

EMP_t = Growth (annual percentage change) of employment

GDP_t = Growth (annual percentage change) of real GDP

Survey of Professional Forecasters (SPF) uncertainty measures

${\sigma }_{spfgdp,t}^2$ = survey of professional forecasters variance of GDP

${\sigma }_{spfind,t}^2$ = survey of professional forecasters variance of industrial (manufacturing) production

Estimation generated uncertainty measures

${\sigma }_{gdp,t}^2$ = GDP uncertainty

${\sigma }_{infl,t}^2$ = inflation uncertainty

${\sigma }_{SP500,t}^2$ = S&P 500 uncertainty

${\sigma }_{fuel,t}^2$ = fuel price uncertainty

^4.As noted in section 5, the uncertainty terms are measured in natural logarithms.

Table 3.1.

Growth of employment specifications. Dependent Variable: EMP_t

	Size Group: All Businesses						Size Group: Large (≥500 Employee) Businesses
	S1	S2	S3	S4	S5	S6	S1	S2	S3	S4	S5	S6
Const.	−0.0264* (0.001)	−0.0273* (0.001)	−0.0239* (0.087)	−0.0486* (0.023)	−0.0314* (0.001)	−0.0493* (0.001)	−0.0183* (0.055)	−0.0197* (0.001)	−0.0087 (0.653)	−0.0555* (0.048)	−0.0243* (0.013)	−0.0382* (0.001)
EMPt−1	−0.2261 (0.122)	−0.3510* (0.070)	−0.3517* (0.034)	−0.4135* (0.048)	−0.2208 (0.128)	−0.4797* (0.0142)	0.1390 (0.202)	0.1867* (0.038)	−0.0015 (0.992)	0.1216 (0.204)	0.1703* (0.041)	0.0185 (0.869)
EMPt−2	−	−	−	−	−	−	−	−	−	−	−	−
GDPt	0.5624* (0.006)	0.5110* (0.001)	0.6924* (0.001)	0.5858* (0.001)	0.5854* (0.001)	0.4492* (0.001)	0.6119* (0.009)	0.5776* (0.001)	0.7452* (0.000)	0.5833* (0.001)	0.6129* (0.001)	0.5121* (0.001)
GDPt−1	0.7489* (0.002)	0.8648* (0.001)	0.8168* (0.002)	0.9315* (0.001)	0.7659* (0.001)	0.9676* (0.001)	0.6213* (0.002)	0.5711* (0.005)	0.6656* (0.003)	0.5516* (0.010)	0.5674* (0.003)	0.6839* (0.002)
${\sigma }_{spfgdp,t}^2$	0.0002 (0.950)	−	−	−	−	−	0.0010 (0.799)	−	−	−	−	−
${\sigma }_{spfgdp,t-1}^2$	−0.0025 (0.112)	−	−	−	−	−	−0.0008 (0.696)	−	−	−	−	−
${\sigma }_{spfind,t}^2$	−	−0.0017 (0.221)	−	−	−	−	−	−0.0019 (0.237)	−	−	−	−
${\sigma }_{spfind,t-1}^2$	−	−0.0017 (0.262)	−	−	−	−	−	0.0009 (0.613)	−	−	−	−
${\sigma }_{gdp,t}^2$	−	−	0.0030* (0.063)	−	−	−	−	−	0.0042 (0.125)	−	−	−
${\sigma }_{gdp,t-1}^2$	−	−	−0.0032* (0.049)	−	−	−	−	−	−0.0028 (0.178)	−	−	−
${\sigma }_{infl,t}^2$	−	−	−	0.0004 (0.795)	−	−	−	−	−	−0.0015 (0.465)	−	−
${\sigma }_{infl,t-1}^2$	−	−	−	−0.0026* (0.027)	−	−	−	−	−	−0.0020* (0.091)	−	−
${\sigma }_{SP500,t}^2$	−	−	−	−	−0.0004 (0.541)	−	−	−	−	−	0.0001 (0.903)	−
${\sigma }_{sp500,t-1}^2$	−	−	−	−	−0.0014* (0.099)	−	−	−	−	−	−0.0013 (0.158)	−
${\sigma }_{fuel,t}^2$	−	−	−	−	−	−0.0038* (0.002)	−	−	−	−	−	−0.0026* (0.081)
${\sigma }_{fuel,t-1}^2$	−	−	−	−	−	−0.0017 (0.150)	−	−	−	−	−	−0.0017 (0.159)
$\stackrel{-2}{R}$	0.806	0.825	0.833	0.819	0.819	0.882	0.752	0.764	0.798	0.770	0.762	0.789
ρ	0.177	0.225	0.147	0.264	0.036	−0.133	0.144	0.113	0.051	0.158	0.079	−0.067

Notes:

^1.p-values (two-tailed test) based on efficient standard errors are reported in parentheses. An * denotes significance at least at the 10% level. All specifications are estimated using annual observations over the period 1988–2011 (data details are presented in section 4).

^2.The first-order autocorrelation coefficient is denoted by ρ.

^3.The variable definitions are as follows.

EMP_t = Growth (annual percentage change) of employment

GDP_t = Growth (annual percentage change) of real GDP

Survey of Professional Forecasters (SPF) uncertainty measures

${\sigma }_{spfgdp,t}^2$ = survey of professional forecasters variance of GDP

${\sigma }_{spfind,t}^2$ = survey of professional forecasters variance of industrial (manufacturing) production

Estimation generated uncertainty measures

${\sigma }_{gdp,t}^2$ = GDP uncertainty

${\sigma }_{infl,t}^2$ = inflation uncertainty

${\sigma }_{SP500,t}^2$ = S&P 500 uncertainty

${\sigma }_{fuel,t}^2$ = fuel price uncertainty

^4.As noted in section 5, the uncertainty terms are measured in natural logarithms.

View Table

Table 3.1.

Growth of employment specifications. Dependent Variable: EMP_t

	Size Group: All Businesses						Size Group: Large (≥500 Employee) Businesses
	S1	S2	S3	S4	S5	S6	S1	S2	S3	S4	S5	S6
Const.	−0.0264* (0.001)	−0.0273* (0.001)	−0.0239* (0.087)	−0.0486* (0.023)	−0.0314* (0.001)	−0.0493* (0.001)	−0.0183* (0.055)	−0.0197* (0.001)	−0.0087 (0.653)	−0.0555* (0.048)	−0.0243* (0.013)	−0.0382* (0.001)
EMPt−1	−0.2261 (0.122)	−0.3510* (0.070)	−0.3517* (0.034)	−0.4135* (0.048)	−0.2208 (0.128)	−0.4797* (0.0142)	0.1390 (0.202)	0.1867* (0.038)	−0.0015 (0.992)	0.1216 (0.204)	0.1703* (0.041)	0.0185 (0.869)
EMPt−2	−	−	−	−	−	−	−	−	−	−	−	−
GDPt	0.5624* (0.006)	0.5110* (0.001)	0.6924* (0.001)	0.5858* (0.001)	0.5854* (0.001)	0.4492* (0.001)	0.6119* (0.009)	0.5776* (0.001)	0.7452* (0.000)	0.5833* (0.001)	0.6129* (0.001)	0.5121* (0.001)
GDPt−1	0.7489* (0.002)	0.8648* (0.001)	0.8168* (0.002)	0.9315* (0.001)	0.7659* (0.001)	0.9676* (0.001)	0.6213* (0.002)	0.5711* (0.005)	0.6656* (0.003)	0.5516* (0.010)	0.5674* (0.003)	0.6839* (0.002)
${\sigma }_{spfgdp,t}^2$	0.0002 (0.950)	−	−	−	−	−	0.0010 (0.799)	−	−	−	−	−
${\sigma }_{spfgdp,t-1}^2$	−0.0025 (0.112)	−	−	−	−	−	−0.0008 (0.696)	−	−	−	−	−
${\sigma }_{spfind,t}^2$	−	−0.0017 (0.221)	−	−	−	−	−	−0.0019 (0.237)	−	−	−	−
${\sigma }_{spfind,t-1}^2$	−	−0.0017 (0.262)	−	−	−	−	−	0.0009 (0.613)	−	−	−	−
${\sigma }_{gdp,t}^2$	−	−	0.0030* (0.063)	−	−	−	−	−	0.0042 (0.125)	−	−	−
${\sigma }_{gdp,t-1}^2$	−	−	−0.0032* (0.049)	−	−	−	−	−	−0.0028 (0.178)	−	−	−
${\sigma }_{infl,t}^2$	−	−	−	0.0004 (0.795)	−	−	−	−	−	−0.0015 (0.465)	−	−
${\sigma }_{infl,t-1}^2$	−	−	−	−0.0026* (0.027)	−	−	−	−	−	−0.0020* (0.091)	−	−
${\sigma }_{SP500,t}^2$	−	−	−	−	−0.0004 (0.541)	−	−	−	−	−	0.0001 (0.903)	−
${\sigma }_{sp500,t-1}^2$	−	−	−	−	−0.0014* (0.099)	−	−	−	−	−	−0.0013 (0.158)	−
${\sigma }_{fuel,t}^2$	−	−	−	−	−	−0.0038* (0.002)	−	−	−	−	−	−0.0026* (0.081)
${\sigma }_{fuel,t-1}^2$	−	−	−	−	−	−0.0017 (0.150)	−	−	−	−	−	−0.0017 (0.159)
$\stackrel{-2}{R}$	0.806	0.825	0.833	0.819	0.819	0.882	0.752	0.764	0.798	0.770	0.762	0.789
ρ	0.177	0.225	0.147	0.264	0.036	−0.133	0.144	0.113	0.051	0.158	0.079	−0.067

Notes:

^1.p-values (two-tailed test) based on efficient standard errors are reported in parentheses. An * denotes significance at least at the 10% level. All specifications are estimated using annual observations over the period 1988–2011 (data details are presented in section 4).

^2.The first-order autocorrelation coefficient is denoted by ρ.

^3.The variable definitions are as follows.

EMP_t = Growth (annual percentage change) of employment

GDP_t = Growth (annual percentage change) of real GDP

Survey of Professional Forecasters (SPF) uncertainty measures

${\sigma }_{spfgdp,t}^2$ = survey of professional forecasters variance of GDP

${\sigma }_{spfind,t}^2$ = survey of professional forecasters variance of industrial (manufacturing) production

Estimation generated uncertainty measures

${\sigma }_{gdp,t}^2$ = GDP uncertainty

${\sigma }_{infl,t}^2$ = inflation uncertainty

${\sigma }_{SP500,t}^2$ = S&P 500 uncertainty

${\sigma }_{fuel,t}^2$ = fuel price uncertainty

^4.As noted in section 5, the uncertainty terms are measured in natural logarithms.

Table 3.2.

Growth of Employment Specifications Dependent Variable: EMP_t

Notes: See Table 3.1

Table 3.2.

Growth of Employment Specifications Dependent Variable: EMP_t

	Size Group: Small (<500 Employee) Businesses						Size Group: Small (<20 Employee) Businesses
	S1	S2	S3	S4	S5	S6	S1	S2	S3	S4	S5	S6
Const.	−0.0359* (0.001)	−0.0346* (0.001)	−0.0563* (0.001)	−0.0687* (0.016)	−0.0370* (0.001)	−0.0480* (0.001)	−0.0192* (0.001)	−0.0153* (0.001)	−0.0384* (0.001)	−0.0279 (0.151)	−0.0174* (0.001)	−0.0221* (0.013)
EMPt−1	−0.4107* (0.012)	−0.5815* (0.002)	−0.4837* (0.007)	−0.5318* (0.018)	−0.3907* (0.042)	−0.5465* (0.004)	0.0943 (0.594)	−0.0239 (0.873)	−0.0322 (0.862)	0.1030 (0.637)	0.1013 (0.581)	0.0136 (0.941)
EMPt−2	−	−	−	−	−	−	−0.2844* (0.084)	−	−	−	−	−0.2754* (0.013)
GDPt	0.4495* (0.046)	0.4492* (0.001)	0.5554* (0.002)	0.5503* (0.001)	0.5806* (0.001)	0.4363* (0.001)	0.2969* (0.007)	0.4223* (0.001)	0.3990* (0.001)	0.4519* (0.001)	0.4792* (0.001)	0.3781* (0.001)
GDPt−1	0.7867* (0.001)	0.8903 (0.001)	0.7612* (0.003)	0.8475* (0.004)	0.7603* (0.003)	0.9219* (0.001)	0.1232 (0.315)	0.0676 (0.532)	0.1040 (0.473)	0.0551 (0.723)	0.0625 (0.671)	0.1813 (0.1053)
${\sigma }_{spfgdp,t}^2$	−0.0014 (0.658)	−	−	−	−	−	−0.0028* (0.063)	−	−	−	−	−
${\sigma }_{spfgdp,t-1}^2$	−0.0039* (0.008)	−	−	−	−	−	−0.0031* (0.004)	−	−	−	−	−
${\sigma }_{spfind,t}^2$	−	−0.0025* (0.051)	−	−	−	−	−	−0.0026* (0.001)	−	−	−	−
${\sigma }_{spfind,t-1}^2$	−	−0.0029* (0.014)	−	−	−	−	−	−0.0015* (0.039)	−	−	−	−
${\sigma }_{gdp,t}^2$	−	−	0.0004 (0.819)	−	−	−	−	−	−0.0015 (0.236)	−	−	−
${\sigma }_{gdp,t-1}^2$	−	−	−0.0038* (0.010)	−	−	−	−	−	−0.0017* (0.063)	−	−	−
${\sigma }_{infl,t}^2$	−	−	−	−0.0010 (0.594)	−	−	−	−	−	−0.0014 (0.208)	−	−
${\sigma }_{infl,t-1}^2$	−	−	−	−0.0027* (0.075)	−	−	−	−	−	−0.0003 (0.809)	−	−
${\sigma }_{SP500,t}^2$	−	−	−	−	−0.0001 (0.861)	−	−	−	−	−	−0.0003 (0.562)	−
${\sigma }_{sp500,t-1}^2$	−	−	−	−	−0.0020* (0.030)	−	−	−	−	−	−0.0012* (0.036)	−
${\sigma }_{fuel,t}^2$	−	−	−	−	−	−0.0038* (0.003)	−	−	−	−	−	−0.0027* (0.0033)
${\sigma }_{fuel,t-1}^2$	−	−	−	−	−	−0.0006 (0.692)		−	−	−	−	−0.0001 (0.899)
$\stackrel{-2}{R}$	0.749	0.796	0.773	0.741	0.755	0.795	0.745	0.768	0.724	0.629	0.667	0.754
ρ	0.124	0.134	0.241	0.213	0.111	0.160	0.001	0.063	0.117	0.066	0.113	0.095

Notes: See Table 3.1

View Table

Table 3.2.

Growth of Employment Specifications Dependent Variable: EMP_t

	Size Group: Small (<500 Employee) Businesses						Size Group: Small (<20 Employee) Businesses
	S1	S2	S3	S4	S5	S6	S1	S2	S3	S4	S5	S6
Const.	−0.0359* (0.001)	−0.0346* (0.001)	−0.0563* (0.001)	−0.0687* (0.016)	−0.0370* (0.001)	−0.0480* (0.001)	−0.0192* (0.001)	−0.0153* (0.001)	−0.0384* (0.001)	−0.0279 (0.151)	−0.0174* (0.001)	−0.0221* (0.013)
EMPt−1	−0.4107* (0.012)	−0.5815* (0.002)	−0.4837* (0.007)	−0.5318* (0.018)	−0.3907* (0.042)	−0.5465* (0.004)	0.0943 (0.594)	−0.0239 (0.873)	−0.0322 (0.862)	0.1030 (0.637)	0.1013 (0.581)	0.0136 (0.941)
EMPt−2	−	−	−	−	−	−	−0.2844* (0.084)	−	−	−	−	−0.2754* (0.013)
GDPt	0.4495* (0.046)	0.4492* (0.001)	0.5554* (0.002)	0.5503* (0.001)	0.5806* (0.001)	0.4363* (0.001)	0.2969* (0.007)	0.4223* (0.001)	0.3990* (0.001)	0.4519* (0.001)	0.4792* (0.001)	0.3781* (0.001)
GDPt−1	0.7867* (0.001)	0.8903 (0.001)	0.7612* (0.003)	0.8475* (0.004)	0.7603* (0.003)	0.9219* (0.001)	0.1232 (0.315)	0.0676 (0.532)	0.1040 (0.473)	0.0551 (0.723)	0.0625 (0.671)	0.1813 (0.1053)
${\sigma }_{spfgdp,t}^2$	−0.0014 (0.658)	−	−	−	−	−	−0.0028* (0.063)	−	−	−	−	−
${\sigma }_{spfgdp,t-1}^2$	−0.0039* (0.008)	−	−	−	−	−	−0.0031* (0.004)	−	−	−	−	−
${\sigma }_{spfind,t}^2$	−	−0.0025* (0.051)	−	−	−	−	−	−0.0026* (0.001)	−	−	−	−
${\sigma }_{spfind,t-1}^2$	−	−0.0029* (0.014)	−	−	−	−	−	−0.0015* (0.039)	−	−	−	−
${\sigma }_{gdp,t}^2$	−	−	0.0004 (0.819)	−	−	−	−	−	−0.0015 (0.236)	−	−	−
${\sigma }_{gdp,t-1}^2$	−	−	−0.0038* (0.010)	−	−	−	−	−	−0.0017* (0.063)	−	−	−
${\sigma }_{infl,t}^2$	−	−	−	−0.0010 (0.594)	−	−	−	−	−	−0.0014 (0.208)	−	−
${\sigma }_{infl,t-1}^2$	−	−	−	−0.0027* (0.075)	−	−	−	−	−	−0.0003 (0.809)	−	−
${\sigma }_{SP500,t}^2$	−	−	−	−	−0.0001 (0.861)	−	−	−	−	−	−0.0003 (0.562)	−
${\sigma }_{sp500,t-1}^2$	−	−	−	−	−0.0020* (0.030)	−	−	−	−	−	−0.0012* (0.036)	−
${\sigma }_{fuel,t}^2$	−	−	−	−	−	−0.0038* (0.003)	−	−	−	−	−	−0.0027* (0.0033)
${\sigma }_{fuel,t-1}^2$	−	−	−	−	−	−0.0006 (0.692)		−	−	−	−	−0.0001 (0.899)
$\stackrel{-2}{R}$	0.749	0.796	0.773	0.741	0.755	0.795	0.745	0.768	0.724	0.629	0.667	0.754
ρ	0.124	0.134	0.241	0.213	0.111	0.160	0.001	0.063	0.117	0.066	0.113	0.095

Notes: See Table 3.1