Extra actions, then fewer actions later, makes a major change that would be hard to account for, especially if it opens up casting 2 2-action spells. I'd avoid as a GM at all costs, and even as a player (assuming I had other gaming outlets).
Also, this is homebrew, very much off the norm, so should be moved there.
There are benefits that go the other direction too, such as being able to Heal a larger percent of the party with a single-target Heal, or needing fewer Death Ward spells to cover the group, and so forth. Being able focus the loot also helps, w/ perhaps the extra share going to consumables that add CE (though I'd argue that's OE, offensive, as it overlooks defense too much). And in a large group, somebody's bound to have a mediocre save vs. an enemy's main shtick, while in a smaller group that becomes less likely.
If you don't want to reduce the enemies, you could bump the PCs +1 level compared to standard. Much simpler. Of course, nobody could be pure support, but I think that's true already at 4 players. Everybody has to contribute offensively.
Something that's just occurring to me is maybe you could open up another Hero Point option for when they pass the halfway mark on their h.p., to account for those fluky criticals. How that'd work would be up to you.
Currently being GM for a party of 2, so I feel your pain.
For my group, we focus more on the story than the combat. There is combat certainly, but often it is lower stakes. Enemies don't often fight to the death and I expect that the PCs won't either. If things get rough, running is an option. Find or create a chase ruleset that you like.
Reward non-combat solutions to problems. Talking your way out of trouble. Sneaking in/out. Just make sure that the success/failure of the scenario doesn't hinge on one roll. It is actually easier to do this with a smaller group than a larger one. Fewer chances to mess things up with a bad roll when everyone has to roll a stealth check. Also if one person is making the majority of the rolls, that is also a higher percentage of engaged players than you would have with a 4 or 5 player group. And as far as tension - that can go through the roof in a skill-based encounter that can result in TPK-equivalent if things go too badly.
As far as combat:
I worry about giving everyone 4 actions by default. That would allow two spells or other 2-action abilities per round. It changes too much. The game isn't set up to handle that.
I like the idea of slow. One thing you noted (which I fully agree with) is that dropping a player in a small party is much more impactful than dropping a player in a normal size party. Players should feel that risking a player dropping is much more of an impact than in a normal full party. If they don't already feel that way, you could implement a 'slow on damage' effect. When lower than half HP, characters become slowed 1 from the damage. This wouldn't be needed if the players already feel quite a bit of tension when they start dropping low in HP (and start looking for ways to cut and run).
Similarly, to mitigate some of the problem with a dropped character: Change the death and dying rules. When you are at 0 HP, you don't fall unconscious. Instead you remain conscious, but only have one action each round that has limited ability. You can't use 'strenuous' actions (which you as GM will have to decide exactly what that means). The intent being that players can pick themselves up instead of having to rely on the other party members (and taking the additional hit on party actions) to pick them up.
Has the thought of setting all encounters as if the party was at one level lower than they are flashed through your calculations of CE = 0.11123?Sure have, and while it makes the encounters easier and less likely to TPK the party, it doesn't really help with the fundamental problem: that with a smaller party the tools the DM has to signal danger/raise tension/etc are too coarse compared to the effect of those same tools when applied to larger parties.
Having a PC go down, and needing another to spend a whole turn to bring them back up, is still a hit of 2/3 of the party's CE for a three person party, whether they're facing an encounter at Lvl+2 or Lvl-1. The encounter level only changes how likely they are to survive such a coarse hit.
When a PC goes down, their initiative is moved to just before the enemy that brought them down. That does mean that no actions are lost by that PC if there is only 1 enemy and that PC is healed before their next turn. The game does this to somewhat mitigate the problem you've recognized.
What you didn't consider what that the stand up action usually takes a PC that was knocked down an extra action after coming back up to get to full combat speed.
Overall, your 2/3 of the party's CE is probably close enough.
The mechanical difference between taking a level from the monsters or adding a level to the PCs is negligible (though having a breadth of resources from being higher favors that), especially if running your own material. But if running published adventures, it's simpler to do the adjustment once (to the PCs) and be done with it (at least until 20th!).
And I'd add that the PCs should be built knowing they'll be operating in a small group. Actions toward another PC (rather than toward killing the enemy) become that much more costly when they represent that much more of the party's action total. No casting "Bless", each PC should have offense every round possible, especially when people start getting tripped or swallowed.
So a Fighter should have a reach setup where they can use AoOs, as it's that much more of a % boost to offense, while also be able to convert to sword & board to mitigate damage when needed.
Everybody needs to be mobile, probably have self-healing (like a Champion or Monk, perhaps via MCD), and should have solid saves & AC because that stat now protects a larger % of the party. And I'd just avoid 6 h.p. classes altogether.
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I'm playing in a party of 3 players. Our GM, after getting the GM's Guide, decided to allow all of us to become Dual-class characters. We've had a few fights so far as Dual-classed characters, and while we have a few more options to choose from each round, our power level doesn't seem to be massively boosted. I think it was a good way to handle it. It was the only way for the GM to get any arcane spellcasting into the group...
Dual class would certainly help grant options for certain availability of buff/rebuff actions that would have otherwise been short due to fewer players. This makes it a pretty good idea, although does not necessarily correct the percent loss due to party members losing actions or going down.
If you don’t want to do full Dual class, consider free archetype. (Perhaps even giving a free 2nd level archetype dedication out at 1st to start them on their path)
Certainly like the idea of allowing the individual to remain conscious while at dying 1 but limited to only one or two actions. Maybe have dying impart a temporary slow effect equal to its value. This reduces the impact of consuming others actions when someone goes down, which you pointed out is a bigger deal for a smaller party.
Make sure you make use of hero points, and perhaps give out more. Potentially give out a party reserve, which are shared but only can be used to reroll saves, or perhaps have them have option to have those reroll an enemy’s attack, but only if it would take someone to dying.
If you are concerned about advancing the players all one level, fearing it would offset things too much, you could simply provide the Automatic Bonus Progression for the party members, in addition to what magic items they acquire. Or insure they have a more plentiful supply of consumables to help offset the quicker depletion of resources in the party.
Ok if dungeon is for level N
Honestly I’d consider:
dual-class option
perhaps also use racial paragon option
set class level to N+1
wealth as N+1 plus Automatic Bonus Progression, or at least Permanent items as per level N+1; and consumables as level N+1 plus the consumables of level N.
If adjusting monsters you could limit any groups of monsters more than the party to two actions, unless the creature is using a single three action activity. Or limit the number of creatures using all three action in their round to be equal to the number of players.
And actually, to use rules that exist already, consider making some smaller mooks be defined as minions of a more powerful enemy, so it has to use an action of its to direct its minion. This would be using established rules, and can consume some actions.
Another option, provide the players with a free animal companion or other form of minion constantly at their disposal.
Problem is, it didn't, and doesn't, address the issue of not having more fine grained ways to 'hurt' the PCs. Sure, they bring more punch and more options to the fight, but it doesn't help the nature of only having cannons in my arsenal to affect the party with. Sometimes I want to deliver a mosquito bite instead, or even a swift kick, rather than a cannon, but I still want them to feel it. Instead, it still feels like just playing with cannons: you're fine until you get hurt, and then it's taken a huge chunk out of you (read: "the party").
Any other good options for incrementally hurting the Combat Effectiveness of a small party?
Minor hinderances to party effectiveness without risking character death and dying... Sounds like conditions would be the best option.
Now, how to deliver it:
Monsters could do it. Trade out some of the damage that they normally do for a condition that gets applied on hit. Depending on the condition, it may need to be re-applied on each hit. Like causing clumsy 1 as a rider on each successful attack but it only affects one round or even the next attack by that character. or it might be a one-time special that can be removed by the party. Like a dazzling presence that the monster can trigger at the start of the battle that can be removed by a flat check the same way persistent damage can be.
Hazards could also do the job. A needle trap that applies enfeebled 2 but does no damage.
Even the environment itself would work. The Bog of Eternal Stench that causes sickened 1 that cannot be removed while in the area.
And any or all of these could be combined with regular enemies in an encounter to make the (party level -1) enemies a much more serious threat overall - even if they don't have any more HP or damage than normal.
So I think that would be a good way to continue using enemies that won't one-shot any one of your player characters, but still have a more threatening encounter overall.