A feature of business cycles is that growth in the number of companies declines as production growth declines. During the Great Recession, very small establishments were more negatively affected than their larger peers, according to a recent Economic Synopses essay.
Using the National Establishment Time Series (NETS), Economist David Wiczer and Senior Research Associate Daniel Eubanks compared very small establishments (that is, those with five or fewer employees including the owner) with ones with more than five employees.1
Of the establishments that were operational in January 2007, the authors found that the smallest ones had a much higher exit rate by 2010. In particular, when weighted by employment, very small establishments closed at about twice the rate of larger ones.
“Among workers at very small establishments, more than one in four were displaced because their shop did not survive the Great Recession, while that number was about one in six for workers at larger establishments,” the authors wrote.
Wiczer and Eubanks also examined the survival rate of establishments (weighted by employment) by 2007 sales quartile. The quartiles are shown in the table below.
|Average Total Sales of Establishments|
|by Employment Size and Sales Quartile in 2007|
|Sales Quartile||More than Five Employees||Five or Fewer Employees|
|SOURCES: National Establishment Time Series (NETS) and authors’ calculations.|
|Federal Reserve Bank of St. Louis|
The authors showed that very small establishments were disproportionately affected between 2008 and 2010, which caused a widening gap in survival rates between very small establishments and larger ones. “While their average survival rate was within 2 percent of the larger establishments’ rate before 2008, it increased dramatically to more than 10 percent after 2008,” they explained. (For a figure showing these survival rates, see the Economic Synopses essay “The Survival Rate of the Smallest Establishments During the Great Recession.”
Furthermore, they pointed out that among the larger establishments, the ones with the most sales (i.e., those in the fourth sales quartile) closed less frequently. In contrast, among the very small establishments, those in the first sales quartile had the highest survival rate in 2010, while those in the second sales quartile had the lowest.
The authors concluded that very small establishments are much more cyclically sensitive than their larger peers in some ways. “However, within the group of very small establishments, the smallest are not the most vulnerable,” they wrote.
1 The authors noted that an establishment is a single location where goods or services are produced.