October 20, 2014

Have We Lost a Generation of Small Business Owners?

We’re down more than 1.1 million. That’s how many fewer self-employed Americans there are today than when the Great Recession began.

According to Bureau of Labor Statistics figures, there were 589,000 fewer incorporated self-employed people and 569,000 fewer unincorporated self employed people in February 2011 than in December 2007. Perhaps most remarkably, on a non-seasonally adjusted basis, we have 753,000 fewer self-employed people now than when the recovery began in June 2009.

The most severe losses have been among the one third of the self-employed who head corporations. As the figure below shows, back in December 2007 there were 589,000 more incorporated self-employed Americans than there are today, and back in June 2009, there were an additional 95,000.

Incorporated self-employedClick for larger chart

The recession and tepid recovery that has followed has eliminated 10.1 percent of the incorporated self-employed. To give you a sense of the magnitude of this loss, between December 2007 and February 2011, the total number of Americans with jobs declined by 5.6 percent on a non-seasonally adjusted basis.

As a result of the recent decline, the current level of incorporated self-employed is back to the level we had in April 2004, despite a significant increase in the population.

The disappearance of so many incorporated self-employed is troubling given the characteristics of this type of self-employment person. An article by Steve Hipple, a BLS economist, explains that self-employed heads of incorporated businesses are less likely to work part time and are more likely to have employees. Moreover, nearly half of self-employed heads of corporations have at least a college education, making them more educated than the unincorporated self-employed, on average.

Hipple finds that many incorporated self employed are found in construction and professional services. Doctors’ offices, law firms, accounting firms, dental practices, real estate agencies and insurance agencies, for example, all involve a lot of incorporated self-employment.

The staggering reduction in the particularly valuable incorporated form self-employment has me wondering, “How long it will take America to rebuild our stock of small business owners?”

22 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

22 Reactions

  1. Interesting, opposing conventional wisdom that in economic down turns; business start-ups increase. Worth investigating.

  2. Ouch! Entrepreneurs have always been a rare breed, but this type of loss will be hard to repair. I also agree with Cornelius, that I’ve heard many talk about how recessions spur people to start their own businesses because they can’t find a job, but this goes contrary to that idea.

  3. I suspect that these numbers are based solely on the INCORPORATED self-employed, and does not include sole props (DBAs). Although sole props don’t contribute nearly as much to the economic growth as incorporated small biz, we are seeing the highest entrepreneur start-up rate we’ve seen in more than 15 years, and that is a good news. The recession has forced former employees into entrepreneurship, simply because searching for work the past two years has proven to be a fruitless effort. Some of these sole props will do amazing things! Small business IS on the rise, it’s just not the “big” of small business.

  4. I wonder how many students that graduate from the entrepreneurial studies programs at major universities, like Case Western, actually end up becoming entrepreneurs? The owners of small businesses with sales less than $10 million average 57 years in age. Many of these businesses will transition ownership in the next ten years. Is there a new generation of small business owners ready to step in? Do we have a structural problem in America that will result in higher levels of liquidations rather than successful ownership transitions? Even Warren Buffet is struggling to find a successor. Hmm….

  5. Not surprised by this statistic. Although some may argue its much easier to grow a business today with widely accessible technology and support systems that can help a business get off the ground, its a much more competitive landscape. Large established goliaths are leveraging the same technology to hyper-target the local, making things tough for the resource-strapped little guy.

    -Ryan
    Lumnari.com
    Move Your Business Forward Faster

  6. @Kristine Putt – I noticed that the article also states that their are 569,000 fewer unincorporated self-employed persons.

    I find this easy to believe. There are some people that try to make a living online, and that number is probably dropping as the internet business place is getting filled with a lot of competition. It is more difficult to build a start-up internet business than it was ten years ago.

  7. @Wade, you’re right, the article DOES state that, but what I was trying to say is that I think the stats are incorrect, or more to the point, that the actual numbers (of the emergence of start-ups) has not been fully calculated yet by the BoLS.

    An article came out last week on Inc.com stating exactly the opposite: http://bit.ly/eNMGGo

    I work SOLELY with small business start-ups. My business did feel the “recession,” but only slightly. And since Feb this year, I have more work than I can handle and my phone won’t stop ringing. So by my calculations alone, small business start-ups ARE on the rise. And that means we all can look forward to more competition ;)

  8. For those of you interested in more statistics summarizing the effect of the Great Recession on the number of start-ups and small businesses in the U.S., please see this link to a commentary I wrote for the Federal Reserve Bank of Cleveland:

    http://www.clevelandfed.org/research/commentary/2011/2011-04.cfm

  9. Thanks, Scott!

    You wrote that “The current level of incorporated self-employed is back to the level we had in April 2004, despite a significant increase in the population.” Wow!

    The first thing I thought of after reading it was this;

    Small Business Failure Rates. It sure seems like a lot of downsized middle management types and executives are starting businesses. Some of them don’t seem to have a choice; the $200,000 a year job market isn’t too pretty, right now.

    I sure hope that this generation of entrepreneurs does better than the last ones. There’s certainly more information available to help these folks make fact-based business start-up decisions.

    Right?

    The Franchise King®

  10. Some interesting points here Scott and perhaps not all that surprising.

    Small business failure is mentioned in a comment as the possible reason but given that new start-ups are on the way up I would suspect that start-up and failure will almost balance out equally. This, from what I’m seeing as a small business coach, certainly appears to be the case with new online businesses.

    John Barlow quotes the average age of small business owners with sales < $10 million as 57 and that I believe is where part of the problem lies. We are talking about professional people of the Baby Boomer generation. They have usually enjoyed running their own business but from their early fifties onwards they tend to be ready for a sea change. This often takes the form of working as an unincorporated business owner on something totally different such as a favourite hobby or other interest. I have been working with quite a number of people who have gone this route with an ageing population I suspect that any significant reversal of this trend is not very likely.

  11. Hi Scott,

    It is indeed sad to read these figures, I guess this is what happens to an economy in recession. Entrepreneurs have had a bad phase with their businesses in the past few years and these statistics surely say a lot of how many of them have struggled to survive. Let’s hope we have better times ahead! Thanks for sharing.

    Riya Sam

  12. This seems to show a bit of consolidation amongst small businesses as well. More of a “fit will survive” type of results. But with a poor economy, budgets being slashed, financial decisions becoming more aggressive on price, what else would we expect?

    What I think this does show is the increased expectation on business owners to be aware and active in all areas of business development to squeeze every bit of efficiency out of processes while reaching new untapped customers… and keeping them!

    That takes us from product development, to distribution, to sales and marketing, to customer service and retention. This is something most businesses lack in their first few years of business… the ability to be highly capable in multiple areas of a business.

    Maybe shows the increased need of more advanced and robust entrepreneurial education programs?

  13. Thanks, Scott, for your insight into how the recession is affecting entrepreneurs and small business owners. I was shocked to learn that 10 percent of the incorporated self-employed have been eliminated due to the recession. I work with the Campaign for Free Enterprise, a project of the U.S. Chamber of Commerce, and our goal is to provide small business owners and entrepreneurs with tools and research to help them succeed.

    Recently we launched the Center for Entrepreneurship to learn from and advocate for entrepreneurs. I hope you’ll check out the center at FreeEnterprise.com/center/ and join the conversation on our Facebook page at Facebook.com/AmericanFreeEnterprise.

    -Hilary

  14. Perhaps, your question can be answered when the government gives better support to small businesses who are trying to save the day. Unfortunately, financing is tough enough to start with – among many things and small businesses need all the help they will need in order to make ends meet in this uncertain economy.

  15. Inc., LLC., Sole Proprietor – my sense is that we are all down. I’m trying to start a new company and raising money is more than a challenge. We actually want to make hardware here in the USA – by the way, I’ve been doing that successfully for more than 25 years and, regardless of the prevailing opinions, we’ll do it again. Another factor may be related to our appetite for Chinese goods. The recent piece on ABC about Made in America goods in your house was not at all surprising. Walmart and others do not support many American manufacturers BTW neither do many Americans. Maybe I should just forgo the hardware and do a Matrixed Internet solution that floats info in the cloud, collects bank data, understands the next pharma solution and provides investors with real- time cash flow analysis of their portfolio companies – all on their iPhone/BlackBerry – with an incredible UI.

    Dan

  16. This article is a wake up call and reality check. The thing that small businesses need to embrace is social media marketing. Why? Because this is the new lead generation of the 21st century and will be a way out of this slump. I have been an entrepreneur for over 12 years and have been part of this roller coaster ride. I must say the future is bright for small business.

  17. As an answer to the concluding question: “How long will it take . . ?” I believe it may never recover. Consider construction. This industry has been decimated by the recession and though the barriers to entry are not high we are likely to continue to see young people get nursing degrees and being hired to take care of our increasingly elderly population rather than start firms to build more homes.

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