Federal Reserve Bank of St. Louis
May 5, 2017
by James D. Eubanks and David Wiczer
Very small establishments, a term used here to mean establishments with no more than five employees. In the Great Recession, very small establishments exited (i.e. went out of business) at a rate nearly twice as high as the economy average. They also saw a much larger decline in sales if they did survive. But even very small establishments with relatively more sales did not have a lower exit rate.
Very small establishments closed at 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. Looking at sales, very small establishments also were more badly hit. At the median, sales were approximately unchanged for larger establishments but fell considerably for very small ones.
Conditions in 2008 particularly disproportionately affected very small establishments. 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.
Among the larger establishments, those with the most sales closed less frequently. Among the very small establishments, however, sales scarcely mattered to their survival rate. The least likely to survive are actually in the second sales quartile, while the most likely to survive are the smallest establishments. This finding is surprising if we believe larger operations are more resilient to shocks.