Recent Trends in Self-Employment

This week I am returning to a topic that I have written about several times since the recession began: what’s been happening to self-employment in the down economy and how it compares to the job situation in the rest of the private sector.

Below is a figure I created from the Bureau of Labor Statistics data on the seasonally adjusted numbers of nonagricultural self-employed and private sector wage employed people in the United States from January 2007 through March 2010. The numbers are set as a percentage of their level in January 2007 to show the relative amount of self and wage employment each month since then. The thick blue line shows the figures for self-employment, while the thick red line shows the corresponding numbers for wage employment. The thin black lines running through each of the thicker lines are the six month moving averages.

Self employmentThe figure clearly shows one common trend. We have seen a substantial decline in the number of self and private sector wage employed people in the non-agricultural sector. In March, self-employment was only at 92.6 percent of its January 2007 level and wage employment was only at 94.2 percent.

But there are also substantial differences in what has happened to the self-employed and people working for others in the private sector. First, the self-employment numbers are much more volatile than the private sector wage employment numbers. There have been several increases in the number of self-employed people since January 2007 that then disappeared in subsequent months. For wage employment, by contrast, the pattern has been periods of no decline and periods of consistent decline.

Second, the decline in self-employment started sooner than the decline in private sector wage employment. Although we first began to see declines in private sector wage employment when the recession began, self-employment began to drop earlier – in mid 2007.

Third, the decline in self-employment was very steep, but bottomed out in October 2008. Since then the trend has been flat to a slight increase. In contrast, wage employment has shown a slower decline, but one that continued longer, accelerating slightly in October 2008.

Fourth, in recent months – since December of 2009 – private sector wage employment has begun to slowly turn around. But self-employment, which had been improving for close to six months turned negative again.

The data show very different patterns from job loss and gains in private sector wage and self-employment. While there appears to be something of an inverse relationship between the two – when the private sector sheds jobs, self-employment picks up and when the private sector adds jobs, self employment declines – the picture is more complicated than that. Self-employment patterns appear to be driven by different forces than account for increases and decreases in private sector jobs.

All of this means that we can’t extrapolate from what is happening to private sector jobs to explain trends in self-employment. We need to look at self-employment trends themselves.

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.