Abstract

This paper investigates the hypothesis according to which the behavior of firms in adjusting the number of employees along the business cycle depends on the firm size. Several authors argue that small and medium-sized enterprises are more hesitant than large enterprises in hiring additional employees in an upswing and laying off workers in a recession. This implies that small and medium-sized enterprises stabilize economy-wide employment over the business cycle. However, while several authors presume such behavior, formal analytical work as well as empirical evidence has been very limited. This paper presents a theoretical framework for the size-specific behavior of firms in hiring and laying off workers and argues that transaction and adjustment costs are important reasons for the size-specific behavior. We also present empirical evidence for the industrial sector in Germany, which confirms the view of a less pronounced employment response of small and medium-sized enterprises to changes in economic activity.