October 31, 2014

The Era of Declining Self-Employment

Self-EmployedEdit

The number of employed Americans rose from 144,144,000 in October 2013 to 144,775,000 in November 2013, an increase of 631,000, according to Federal government data.

That’s good news. More people going back to work is something that everyone – left, right and center – agrees is good for the country.

But a closer look at the data shows that the employment situation isn’t as good for those Americans in business for themselves as for those who work for others. Hidden in the rise in the number of employed Americans is another trend. It’s a divergence between what has happened to people working for themselves (what economists call the self-employed) as compared to those working for others (what economists call the wage-employed).

Last month, the number of wage-employed Americans increased by 673,000, while the number of self-employed Americans declined by 42,000. (Wage employment is total employment minus the sum of incorporated and unincorporated self-employment.)

This divergence isn’t just a one-month aberration. Consider what has happened over the last year. From November 2012 to November 2013, the number of Americans working for others rose by 1,451,000. But, over the same period, the number of self-employed Americans fell by 225,000.

Both wage and self-employment took a similar-sized hit during the Great Recession, with self-employment dropping 5.5 percent between November 2007 and November 2009. During the same period, wage employment declined by a comparable 5.4 percent. But since then the recovery has been uneven. Wage employment has nearly returned to levels seen before the economic downturn. In November 2013, it was only 0.8 percent lower than it was in November 2007. By contrast, self-employment has declined further, and is now 8.1 percent below its November 2007 level.

The divergence in wage and self-employment means that fewer Americans are in business for themselves now than before the Great Recession. Bureau of Labor Statistics (BLS) data reveal that 6 percent of the American population is now self-employed, versus 6.9 percent six years ago. While a difference of 0.9 percentage points might not sound like a lot, it is. If the same fraction of the population was self-employed today as six years ago, 2,223,000 more Americans would currently be self-employed.

The history of self-employment over the past six years stands in sharp contrast to what happened over the previous seven. From November 2000 to November 2007, the number of self-employed Americans increased by 10.9 percent, while the number of U.S. wage-employed rose by only 6.6 percent.

If policy makers are as interested in self-employment as they seem to be at election time, they might take a look at what’s been different over the past six years versus the previous seven. The earlier period was far more favorable to self-employment than the latter one. Perhaps a change in policies is responsible.

Self-Employed Photo Via Shutterstock

24 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.

24 Reactions

  1. Thanks for the new data, Scott.

    And, Happy New Year!

    You wrote:

    “The history of self-employment over the past six years stands in sharp contrast to what happened over the previous seven.

    My late father and I were smack dab in the middle of that.

    We were able to introduce lots of people-mostly the downsized middle manager and exec types-to franchising. Some even became owners and still are today.

    Of course it was a lot easier to get a loan for a franchise start-up back then. And, that’s one the things that made a huge difference.

    The Franchise King®

  2. As expected, it’s tough to be self-employed (and I’m not even talking about the tax disincentives)

    • It is generally tougher to be self employed. That’s because you have to look out for yourself. Being employed in a company means that someone else is looking out for you. Sure, you may get stressed out and do things that you don’t want to do but you will be properly compensated for it. That’s not the case when you’re self employed.

    • Being self-employed has its risks like late payment or even default of payment from clients, even though there is the freedom of calling the shots.

  3. It seems like the government is against people who have the drive to do something for themselves and are determined to make it in this world.

  4. It’s a mad shame for the number of the self-employed to shrink in the last few years.

    It isn’t easy for the small business owner to succeed in today’s market due to external factors that can become extremely harsh on them.

    I still think we can push through and persevere with our own businesses and influence others to do the same.

    Thank you,

    – Samuel

  5. I’m wondering why the self-employed figure has gone down. Yes, it’s hard work, very, but what’s driving people away from self-employment more now than before? I imagine the economy is no worse than it used to be, so why the drop?

    You mention policy changes. Maybe it’s indeed that.

    • Perhaps I am missing something, but the decline in self-employment could be due to the fact that these same people were part of the 631,000 that became employed. When not able to obtain a job, the next best option is to become self-employed. Some choose that option, others had that option thrust upon them. It’s not too far fetched to believe that some, when the job market became more favorable, decided to go find regular employment.

  6. Interesting data and great analysis of it. However one thing to note is that there is still a lack of substantial growth in permanent full time employment. Many new jobs gained have been part time or considered temporary employment. Also one thing that may not be reflected in government data is the number of Americans who have side businesses while employed. Great article though!

    • Those are very much factors to bear in mind, Matt, as I just don’t think it’s as straightforward as a number of people giving up on self-employment and going back to the work force.

  7. Scott,

    I personally think it’s not a good trend. Employees have slim hope to turn into business owners; the self-employed has a chance to turn into a business which provides new jobs.

    I was a self-employed and after 4 years of going solo, I started to hire people. Now I have 5 staffs helping me running my business. Contributing 5 new jobs is not that big deal, but at least I’m making a difference :)

  8. It seems that while self employment may sound attractive and easy, it is still not as easy when implemented. After all, if it is really that easy, then these people should not have returned to their day jobs. I guess the rising challenges for small businesses also contributes to the fact that this is happening.

    • I agree with that. Being self employed means you have to deal with problems like non payment or late payment with clients. That is why I found a debt collector for our company from the internet.

  9. A very significant article. When the threat of more taxation, a dominating regulatory environment, and health care uncertainty come into play, it’s no wonder people aren’t starting businesses.

    • So which companies will be left, hiring people with an increased bureaucracy with red-tape, taxes and regulations? Is it so called jobs in public sector that will be the only option in the future? In Sweden, I think that the public sector is about 50 percentage.

  10. Thank you for the thought-provoking article, Scott. However, I don’t think it is as simple as policy changes over the last 6 years. In fact, it is more likely a complex combination of factors, including policies over the last several decades. The 1980-1990 farm policies and new popularity of limited liability corporations, for instance, that eliminated so many self-employed farmers and moved so many more of the self-employed to incorporation. (wage and salary workers include incorporated self-employed – they are not included in the self-employed numbers. http://www.bls.gov/news.release/empsit.t08.htm#cps_empsit_a05.f.1
    Wage and salary workers(1)… (1) Includes self-employed workers whose businesses are incorporated.)

    Further, it was from 2007-2009 that our economy lost over half a million jobs, and almost $154 million due to closed non-employer (single owner) firms.

    Rising health care costs played a part, just as it is projected that decreasing health care costs in the coming years will help to increase self-employment.

    http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=NES_2007_00A2&prodType=table http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=NES_2008_00A2&prodType=table http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=NES_2009_00A2&prodType=table)

    In fact, from 2009 to 2011, we increased self-employment: http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=NES_2011_00A2&prodType=table

    Our heavy focus on ‘gazelle’ companies since the introduction of the term by David Birch in the early 1980’s may also bear some responsibility. Gazelles, by definition (fast-growth/high-growth companies) turn into big companies rapidly. From 1998-2009, self-employed and micro firms (those employing up to 19 people), were responsible for creating over 6 million net jobs. During the same period, Firms with 20 or more employees only created a net of 900,000. http://www.bls.gov/bdm/bdmfirmsize.htm#SIZE1 In fact, historically, larger firms destroy more net jobs than they create. Gazelles get eaten by lions. Maybe because they are not well fed and can’t continue at the same pace? The low-growth/slow-growth companies, however, are often passed down over generations.

    Imagine Ivan Widjaya’s and Joel Libava’s success multiplied by 20 million or so, then again by 2-9 employees each. Should we, maybe, just possibly, be focusing policy on resources – human, capital, physical and intellectual – for non-employers and micros? After all, if we better nurture the grass, plants and shrubs, the gazelle population should fare even better.

  11. The declining number of self-employed workers is simply another indication that the old-fashioned methods of calculating employment and economic growth should be thrown out the window as they simply are no longer relevant in the constantly changing economy of the 21st century.

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