August 27, 2014

Should We Count Non-Employer Businesses?

An increasing share of American businesses have no employees.  That trend makes it difficult to understand what’s been happening to American entrepreneurship over the past 20 years. Because non-employer businesses are so numerous and so different from employer businesses, the sliding share of businesses with employees makes it difficult to compare apples-to-apples over time in the small business sector.

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The most recent data provided by the Office of Advocacy of the U.S. Small Business Administration shows that, in 2010, 21.7 million U.S. businesses were without employees, while only 5.6 million had them. At 79 percent of all American companies, the characteristics of non-employers swamp the overall data.

But non-employers account for very little of the economic impact of small businesses. Non-employer businesses are virtually a rounding error in the measurement of business sales. The most recent Census Bureau data show that non-employer firms accounted for only 4 percent of business receipts in 2009. The average non-employer business generated less than $40,000 in annual sales in that year.

Similarly, data released by the Office of Advocacy of the Small Business Administration show that non-employers accounted for only 7 percent of capital expenditures by U.S. businesses in 2009, the most recent year reported. And, of course, non-employer businesses accounted for none of the country’s employment.  The economic impact of non-employer businesses is so slight that the Census Bureau refrains from measuring employer and non-employer businesses together.

Here’s an example of why: In 2009, the average capital expenditure of businesses with employees was $177,000, while that for non-employers was only $3,500.

Combining the two businesses often leads to estimates that hide what’s going on in the economy. For instance, the number of people working for the average U.S. business declined from 4.8 in 1992 to 4.3 in 2009, suggesting that the size of American companies is shrinking.

However, that trend is actually an anomaly of the increasing share of non-employers, which increased from 73.4 percent of U.S. companies in 1992 to 79.5 percent in 2010. Employer businesses have actually grown since the early 1990s, with average size of an employer business increasing from 18.2 to 19.9 between 1992 and 2009.

Similarly, average capital expenditures of U.S. businesses declined a slight 4.9 percent in real terms between 1997 and 2009. The decline in average capital expenditures was a much scarier-looking 28.4 percent in inflation-adjusted terms over that period when all companies are measured. That’s because most of the decline in capital spending comes from the rising in the share of non-employer businesses.

Patterns like these suggest that we need to understand why fewer and fewer American entrepreneurs are starting businesses with employees. Without knowing the answer to that question, just interpreting the data on small business will be difficult.


Question Photo via Shutterstock

8 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.

8 Reactions

  1. Do you know if these figures take into account the independent contractors? It is possible that small businesses are hiring more independent contractors because of the ease and the relative hassle of hiring and managing an employee. Thanks for the post, Scott.

    • I think Tomas has a good point, as does Joel. I own a non-employer business and prefer to hire independent contractors on projects/trips because that currently makes more sense for me. I do intend to grow the business to the point where I can add employees.

      Thanks for the post, Scott.

      Jared
      Sports Power Weekends

  2. Very interesting. Thanks very much for posting this. :)

  3. Thanks, Scott,

    This is a tough one.

    I know several one-person businesses that have very high sales revenue. And,they buy stuff, and pay taxes.

    I say keep including non-employee businesses. More of them are being created every day.

    And, some of them will become large enough to add employees, eventually.

    The Franchise King®

  4. This trend is a result of various economical changes and personal reactions to those. I’ve seen this happening in parts of Europe earlier. Some of the causes can be (the order is not relevant):
    - Individuals expecting tax advantages plus life flexibility versus employment
    - Larger corporations want to have flexibility/cost savings and forcing individuals into independent contractor status.
    - Retired employees need some extra income to fill wholes (would be nice to analyze how the age distribution of owners changed over the years)

  5. “And, of course, non-employer businesses accounted for none of the country’s employment.” – Hmm, I own a non-employer business and it employs me. Don’t I count?:)

    Just kidding – I get the point.

    • I’m not sure I do. I’m a one person shop too, which puts me squarely in the no-employee camp. I’ve been this way for 7 of the past ten years. So if you and I are the typical non-employee business, and there are 21 million non-employee businesses, and if we represented a particular class of “employment”, than the impact that non-employee businesses have on overall employment is pretty significant….about 14% of total employment. That’s a pretty good chunk.

      Anyway. I guess that in the sense that I’m an owner, and not an employee, I haven’t contributed to “employment.” But I still get up every day and work for “The Man”, which in my case is the guy in the mirror.

      He’s kind of a dick too. :)

  6. Keith Pritchard

    I would expand and have employees except that the additional overhead and regulatory headaches would make the business less profitable at a much greater sales volume. The government has driven up the cost and regulatory burden of having employees to a level much too high. You can’t even hire spot labor anymore in their attempt to make even temporary short term hired help to be classified the same as full time permanent. That means you have to do the same paperwork and do payroll deductions, etc. I had a person help me a little before and he said he has to walk he won’t do this for temporary work. The governments efforts to abscond money from even very small transactions along with being able to include this sort of temporary employee in its employment statistics is ridiculous and another form of falsifying employment statistics.

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