Business Cycle and Small Business

Abstract

The authors present the object of small business during the business cycle. The article deals with a deep analysis of the economic indicators of small business, and the behavior of small business during the business cycle. There are pointed out two main economic indicators – the GDP and the ratio of employment. There are used statistical data to compare the impact of small business on the whole economy in Lithuania and in the USA. This study focuses on the behavior of small business compared to large business and tries to discern if there are differences in their activities related to cyclical changes in economy. Consequently, this study will attend to isolate general cyclical relationships rather than focus narrowly on small business activity over the months of recession. There is analyzed the period of 1999-2004 in Lithuanian economy – there is made the analysis of part of the whole Lithuanian GDP created by small business in enterprises with less than 250 employees; value added wealth created by small business relative to industry; also there is shown the relation of employees in small business related to different business sectors. Different industries do react differently to cyclical changes. Some of the most cyclically sensitive industries, such as construction, are predominantly small businesses. Services industries, which produce a large proportion of small business GDP, tend to be less sensitive to the cycle than most other sectors. It is wellknown that certain industries are more prone to cyclical volatility than others. Since the distribution of small businesses across industries is more different than the distribution of large businesses across industries, the differences in the coefficients relating small and large business GDP to overall GDP could be the result of either a business-size or an industry differential. In this article the authors made a conclusion, that small business is less sensitive than large business. The tendency for small businesses to show less sensitivity than large businesses could be explained in a couple of ways. First, this outcome could still be related to differences in industrial mix. Even within these industrial sectors there are industrial sub-sectors that could be expected to react differently to cyclical behavior, and there may be difference in the small and large business shares in those sub-sectors. Secondly, there may be "capacity utilization" differences in how workers are employed in small and large businesses. Large businesses, having several people who do similar jobs, may be more able to remove some people from the payrolls than are small businesses that may have only one or a two people doing a specific job. Large businesses are also much more likely to have a variety of businesses in which they are involved. Therefore, in a downturn, for example, large businesses are more likely to shut down or sell an unprofitable division or sub-sector of their businesses than are small businesses. That results in relatively large changes in employment at one time.