October 26, 2014

Small Business Employment in Recessions and Expansions

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Small business employment has grown more slowly than big business employment since the end of the Great Recession. That wasn’t supposed to happen.

Conventional wisdom is that small business employment declines more in economic downturns, but rises more in economic expansions. Small companies, the argument goes, are more nimble, making their employment decisions more responsive to economic conditions.

The evidence was once consistent with this theory, but the pattern has broken down over the past two decades. Between 1977 and 1991 – but not since 1991 – small company employment grew faster than big business employment during economic expansions and shrank faster during economic contractions.

The earliest data available on this question come from the U.S. Census Bureau’s Business Dynamics Database, which provides annual figures on employment by firm size. Consistent with the “nimbleness hypothesis,” small businesses increased employment by 14.2 percent between 1977 and 1980 (a period of economic expansion), while large businesses increased employment by 11.8 percent. Between 1980 and 1982, when the economy experienced two recessions, small businesses shed 1.6 percent of their workforces, while big businesses added 1.2 percent to theirs’. Finally, in the long expansion from 1982 to 1990, small business employment grew faster than big business employment, rising 27.4 percent versus 20.8 percent for larger businesses.

The pattern continues through the 1990-1991 recession. Using more precise monthly data from the Bureau of Labor Statistics that are available from 1990 to 2011, I have constructed the table below, which shows small and large business employment growth for the different expansions and recessions. As the table reveals, small business employment fell more than big business employment during the 1990-1991 downturn (-2.03 percent versus -0.27 percent), consistent with conventional wisdom.

But that’s where the traditional story breaks down. During the long expansion from 1991 to 2001, small business boosted employment by 17.4 percent, while big business increased employment by 33.4 percent, nearly twice as much. Then in the recession of 2001, companies with 500 or more employees cut employment by 2.7 percent, much more than the 1 percent decline at small businesses, and counter to what most economists would have predicted. During the 2001 to 2007 expansion, big business increased employment by slightly more than small business (5.8 percent versus 5.6 percent). Finally, while small business shed jobs at a higher rate than big business during the Great Recession (7.4 versus 5.8 percent), small company employment rebounded less during the subsequent recovery (0.9 percent versus 1.2 percent) than conventional wisdom would have suggested.

I can’t tell you why conventional wisdom about small and large business employment growth in economic expansions and recessions no longer holds. I don’t have the evidence to evaluate the impact of technological change, a shift in the regulatory environment, different credit conditions or any of the multitude of other factors that policy makers and pundits say is responsible. All I can say is that the “nimbleness hypothesis” appears to be a thing of the past; small businesses no longer increase employment faster than their big business counterparts in expansions while decreasing employment faster in recessions.

5 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

5 Reactions

  1. What can you expect when people lose their jobs? They look for other ways to make a living. And how do they do that? Through having a small business. Sure, they don’t have enough money to fund their new venture but they might as well try. It is better than nothing right?

  2. Hi Scott,
    I know you have no evidence about why small business hiring, and thus one might assume, small business growth, during economic expansions and contractions no longer follows the conventional wisdom, but I’m intrigued. Do you have a theory about why it’s happening? And is it something to worry about? Thanks to member Aira Bongco for sharing this post with the BizSugar community. It would be great if you could answer this question in the comment section on BizSugar so all members could benefit from your insights, Scott.

  3. Hi Scott, this is an interesting analysis and a very similar to the situation here in the UK. I think it may simply be a differing state of mind, i think it is simply a case that the small business owners are now more careful and more fearful and thus have changed their habits, here in England the boarded up shop windows became a massively familiar sign and the vision of ‘closed down’ signs are now prompting different and more careful attitudes.

  4. Small businesses are more nimble to economic conditions like recessions and expansions. They cannot afford to make wrong decisions and costly mistakes which determines their survival in this competitive world.

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