Self Employment Continues to Decline, Despite the Recovery

The recently released Kauffman Index of Entrepreneurial Activity (KIEA) shows that pace of entry into self-employment declined last year. The media has put a positive slant on the news. Because many people go into business for themselves out of necessity when the economy is doing poorly and they have few employment alternatives, this decline is okay, the reporters say. It means that the jobs market is doing better.

There’s a problem with this interpretation; it ignores the continued decline in the number of people working for themselves. Since 2007, America has lost nearly 1.4 million self-employed, or 9 percent of the 2007 level, Bureau of Labor Statistics data reveal. Moreover, the number of self-employed Americans declined both during the Great Recession (when we lost 831,000 self-employed people) and subsequent recovery (when we lost an additional 531,000). That’s very different from what’s happened to employment. The number of employed Americans increased by more than 4 million people between 2009 and 2013.

The problem with the positive spin on the KIEA is that it looks only at one part of the picture – entry into self-employment. But the number of self-employed people is affected by both entry into and exit from self-employment. Like the water in your bathtub, the number of self-employed depends on both inflows and outflows.

Using the figures reported in the KIEA, I created annual estimates of the number of people entering into and exiting from self-employment from 2007 through 2013 and compared that to the stock of self-employed people reported by the Bureau of Labor Statistics for those years to see what’s happened to self-employment.

The KIEA shows that entry into self-employment is counter-cyclical. Between 2007 and 2009 when the economy contracted from the Great Recession, the number of people entering self-employment rose by 441,000. But then, from 2009 to 2013, when the economy expanded again, the number of people going to work for themselves decreased by 574,000.

But, as you probably know, exit from self-employment is cyclical. During the Great Recession, when the economy was contracting, nearly 1.1 people gave up working for themselves because running a business was so hard during that time. During subsequent recovery when the economy was expanding again, the number of people giving up self-employment declined by a little more than 1 million people.

Because economic conditions don’t affect entry into and exit from self-employment equally, the negative effects on self-employment have outweighed the position ones in both the recession and the recovery. As a result, number of self-employed people declined 5.4 percent during the Great Recession and an additional 3.7 percent during the subsequent recovery.

The fact that the number of self-employed Americans has continued to fall during the recovery shows that something is amiss. Fewer people entering self-employment may signal that labor markets are getting better. But the absence of larger declines in the number of people exiting self-employment signals that economic conditions are still not good for those in business for themselves.

Rather than putting a positive spin on the decline in the rate of entry into self-employment, the media and pundits should be focusing on the core problem: Why are we still seeing declines in the number self-employed Americans five years into the economic recovery?

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.