Is Small Business Employment More Resilient to Economic Shifts?

We’re closing in on two years since the beginning of the worst recession in a generation.  Since some experts are saying that the economy is growing again, now might be a good time to look back and see how the recession has affected employment.

A person would have to have been living in a cave for the past 24 months not to know that the overall effect of the recession has been to destroy a lot of jobs and send the unemployment rate up to 10.2 percent.  But what’s less apparent is how the recession has influenced employment in large and small companies.

Below is a figure created from the ADP Small Business Employment Report that compares employment at establishments with 50 or more employees with those at establishments with 1 to 49 employees.  I’ve set the monthly numbers up as a percentage of their December 2007 levels to illustrate how the job loss patterns differ across large and small establishments.

Employment on Non Farm Private Payrolls in Establishments with Fewer and More than 50 Employees as a Percentage of the December 2007 Level.

Source: ADP Small Business Employment Report

Although job loss has been heavy in both large and small establishments, it has clearly been worse in big ones.  In November 2009, non-farm private payrolls at small establishments were at 94.7 percent of their December 2007 levels as compared to only 92.7 percent in large establishments.

But small establishments haven’t just lost fewer jobs during the recent economic downturn they also gained more jobs during the previous economic expansion.  The ADP data indicate that from November 2003 through December 2007, employment in small establishments grew 9 percent, while in large establishments, it increased by only 5 percent.

Small establishments may be more resilient to economic shifts than large ones.  When economic conditions worsen, they may be better able to cut costs and respond without laying people off.  In contrast, when economic conditions get better, they may be able to add new employees at a faster pace.

But before you draw any firm conclusions about the relative advantages and disadvantages of large and small firms as job creators, let me add an important caution.  As I have explained elsewhere, small establishments are not the same thing as small businesses.  And small establishments’ greater job creation may come from small establishments that are part of large businesses, rather than from small independent companies.

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 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.