Firm Size and Change in Employment over the Economic Cycle

Abstract

The objective of this research is to understand if, during economic downturns (and upturns) in the U.S., employment in small businesses is disproportionately more affected than that in large firms. During the COVID-19 pandemic, small firms struggled to recover from their losses and therefore had to cut back on their number of employees despite efforts from the Trump and Biden administrations to hand out emergency relief to small businesses. For a firm size that employs almost half of the private sector employees, the results of this research are critical in identifying solutions to alleviate the burden on businesses disproportionately affected during recessions.

This paper examines the relationship between the change in employment in small versus large firms as compared to the annual real GDP growth rate over the 1979 to 2021 time period. I found that the percent change in employment for small firms does indeed show a stronger linear relationship with real GDP growth rate than the corresponding relationship for large firms. Expanding fiscal support measures to help keep small firms afloat during downturns would indirectly influence their employment and reduce their decline in employment. Additionally, the Small Business Administration (SBA) should prioritize loans primarily based on financial need to combat this disparity and spread resources in a way that benefits more small businesses.