Without a well-functioning small business sector, the economy of Tasmania’s north west coast will be considerably less resilient. The impact of the synergies between the small business sector and big business in our region, cannot be underestimated.

It is often highlighted in the media that the small business sector is the engine room’ of the economy, driving employment and expenditure.  Whilst I understand the political imperative behind this statement, the employment and expenditure data does not support this.  There are higher levels of employment and expenditure, particularly investment expenditure, associated with medium and larger businesses.  Furthermore, medium and particularly large businesses have the capacity to ‘ramp up (and ramp down) employment and expenditure much quicker in response to changes in the economy when compared with the small business sector.

By comparison, there is much less variation in employment within small businesses during each phase of the economic cycle. Comparatively speaking, employment and expenditure in the small business sector is more stable over time – consistent with a sector that displays high levels of resilience during difficult times.   During an upturn, small business employment does not increase significantly because small businesses usually do not have the resources to also significantly increase the additional infrastructure required (land, buildings, equipment) in order to increase output. 

During a downturn, even though output is reduced in a small business, the small business owner is reluctant to lay off significant numbers of workers for the following two reasons.  Firstly, in a small business, each employee is multi-tasking to a much higher degree compared with larger businesses where employees tend to be more of a specialist.  Therefore, for the operator of a small business, during the inevitable upturn, it is much harder to find an employee who can perform a wide range of tasks, that is peculiar to each small business (they are all incredibly different), so it is easier to not put them off in the first place.

Secondly, in a small business, the owner more often works alongside employees because the owner is most likely the key provider of skills, organisational resources and market knowledge. As a result, the owner develops a much closer relationship with their employees when compared with employees in a large business.  Hence, putting someone off during a downturn is a more difficult task due to the ‘emotional’ attachment the business owner has to their employees. The small business owner knows their employees very well and this extends to the likely impact of retrenchment on individual employees and their families.  Hence, retrenchment in a small business is the last, rather than the first response, to an economic downturn.

The impact of all this is that the small business sector, generally, does not significantly increase its employment levels during an upturn, firstly because of infrastructure restrictions and secondly, because it has not put people off during the downturn and still largely retains production/service capacity.

This is not to say that the small business sector does not play a significant role (albeit underrated) in the local economy. As I’ve mentioned previously, the fortunes of the northwest economy are influenced, to a larger extent, by the fortunes of our large national and international businesses, particularly as they relate to direct employment, outsourcing and purchase of local supplies.

Particularly in northwest Tasmania, the small business sector, rather than being described as an ‘engine room’, can be more appropriately described as both a ‘shock absorber’ and a ‘springboard’ for our economy, as we traverse the peaks and troughs of the economic cycle.

When large businesses in our region contract (downsize) in response to falling commodity prices, they typically ‘layoff’ significant numbers of local employees.  This usually results in a flurry of media responses and ‘task force’ responses from government often accompanied by significant sums of money from government to ‘ease the pain’.  The keen observer will note that within 3 – 4 weeks of being laid off, in the vicinity of 70% - 80% of those employees who have lost their jobs, have found alternative employment positions, the majority of which are in small businesses.  These positions may not be the same as the ones they have lost nor is the level of remuneration likely to be as high – but they have a job!  I describe this as the ‘shock absorber’ role of the small business sector

When the economic cycle improves (as it inevitably does), the large businesses commence re-employment in order to develop the capacity to fill orders lost during the recent economic downturn.  Unlike in the retrenchment phase, this happens with very little fanfare or publicity and definitely no repayment of the sums contributed by governments to the larger employers during the downturn!  The speed by which the large businesses are able to return to increased production is largely dependent on the speed by which they can re-employ an appropriate number of skilled workers. 

The fact that most of the retrenched employees are still working locally (with the small business sector) and are also willing and able to return to their previous employment positions with the large firms (usually because of higher wage rates), accelerates the rate at which the larger firms are able to return to the levels of production prior to the downturn.  I describe this as the ‘springboard’ role of the small business sector.

This dual role of both ‘shock absorber’ and ‘springboard’ undertaken by the small business sector provides a significant contribution in terms of resilience and ‘trough smoothing’  to the northwest economy (and I daresay in other economies as well).  A positive ‘by product’ of the largely temporary movement of employees from the ‘big end of town’ to the ‘small end of town’ is the transfer of many higher-level skills to the small business sector.  One of the many benefits of large businesses is that they tend to expend a much higher proportion of their revenues on training when compared with many small businesses.

A key policy insight from this is that the stronger and more resilient the small business sector is in northwest Tasmania, the more able it is to provide the ‘shock absorber’ and ‘springboard’ roles in managing the impacts (both positive and negative) of the fortunes of the big business sector in our region with the resulting positive impacts on our regional economy.