Are Too Many People Starting Non-Employer Businesses?

Starting a Non-Employer Business

In 2013, the number of American businesses without employees per thousand people rose by 0.4 percent to hit a record of 72.72 non-employers for every thousand residents, Census Bureau data reveal. In the same year, average sales at these businesses nudged down by 0.2 percent — about $80 (in 2011 dollars) — to $44,357.

Are rising numbers of non-employers outstripping demand for what they have to sell? Census data from 1997 to 2013 suggest that might be the case.

Since 1997, the per capita number of American companies without employees has risen by 28.5 percent. Over the same period, the average sales at a non-employer business has declined by 16.6 percent when measured in inflation-adjusted terms. The correlation between the two numbers is -0.84 over the 17 year period when the data on the two are available. (A correlation of -1.00 means that two numbers move in exactly opposite directions.)

As the figure below shows, the per capita count of non-employers increased from 56.57 in 1997 to 72.72 in 2013. The number rose steadily between 1997 and 2007, when it hit 72.05. After falling to 70.22 in 2008 — its only recorded decline during this period — the rate rose slowly in each subsequent year. As the R-squared figure on the chart shows, the increase in the per capita number of employer businesses has been pretty close to linear.

Starting a Non-Employer Business
Source: Created from data from the U.S. Census Bureau

While the pattern for sales at non-employer businesses is less linear — the trend has an R-squared of 0.84 — it has displayed a downward pattern over most of the 17 year period data are available, as the chart below shows. After peaking at $56,218 in 2000 (in 2011 dollars), the average sales at a non-employer declined to $44,001 in 2011.

Starting a Non-Employer Business
Source: Created from data from the U.S. Census Bureau

The Census Bureau’s analysts think that most of non-employer businesses are part-time efforts pursued by self-employed people. They are generally very small, accounting for less than 4 percent of all business revenue, and only about 7 percent of all capital expenditures. And, by definition, they do not produce employment for others.

While non-employer firms serve an economic function, Americans are creating them faster than those businesses have things to sell. As a result, the small amount of revenue they generate is being spread across an increasing number of companies.

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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.

One Reaction
  1. What the SBA and everyone else is ignoring, including this article, is this fact – Of the 138.5 million people receiving a paycheck each month, 22.5 million of them, fully one paycheck out of six, receive it from their own business. And the average check is over $40,000, with 20% of the over $250,000.

    That is a very significant source of employment. But because the government, including the SBA, can’t get their hands around it, and can’t control it, they simply ignore it. At the Small Business Administration, these smallest of businesses are invisible – they don’t show up in SBA statistics or SBA strategies.

    These 22.5 million businesses are the most efficient businesses in the world at generating paychecks – nearly all the revenue goes directly to the payroll. Larger businesses have to generate 5 to 10 times as much revenue to create this kind of payroll.

    We need to stop ignoring the 80% of businesses that generate 16% of the paychecks in America. Just because the government can’t get their arms around them doesn’t mean they should be ignored. They are the source waters for building the bigger businesses the SBA and the government loves to promote.

    By the way, there are plenty of other reasons the average revenue per sole owner business has gone down. Our economy is fundamentally changing. For thousands of years 80-90% of all free people owned their own business – it’s in our DNA to own one. With the advent of the internet, cheaper travel, and ease of global communications, people are finding opportunities to once again own their destinies. More and more of them are starting businesses while still employed, until it can support them. That trend will only continue.