Guest Post: The Decline Of Self-Employment and Small Business

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Small business is the incubator of employment. As it declines, so too do opportunities for first jobs, second chances and economic independence.

 

Self-employment and small business are two sides of a single economic coin: financial independence. The Bureau of Labor Statistics (BLS) counts two types of self-employed, the unincorporated and the incorporated. The unincorporated may have employees, but typically do not, i.e. they are sole proprietors. The incorporated have employees, starting with the owner, as the BLS counts the incorporated self-employed as employees of their own corporation.

 

I know that's confusing, but it's important to separate the sole proprietors from those "self-employed" incorporated businesses that have employees: law firms, doctors' offices, accountants, etc.

 

When we speak of "small business," we're referring in large part to the incorporated self-employed: people who establish corporations as the legal structure for their enterprise.

 

Nothing is simple when it comes to parsing all the data, of course, but the BLS has a paper that explains the basic categories: Self-employment in the United States (Bureau of Labor Statistics).

 

The BLS attributes the decline in unincorporated self-employment from 1950 to 1970 to the consolidation of agriculture. As agriculture became more mechanized, small farms were no longer viable and farming required less labor. As a result, many self-employed farmers and laborers became employees or moved to other sectors.

 

The trajectory of self-employment from 1970 to the mid-2000s tracked general economic growth, which was weak in the 1970s but began a 30-year boom in the early 1980s.Things changed in the recession, as the self-employed ranks have lost 1.6 million from the peak in 2007. The number of self-employed has fallen to early 1980s levels: (All FRED charts courtesy of frequent contributor B.C.)

 

 

This chart displays the self-employed as a share of total non-farm employment.The first chart showed a strong rise in self-employment from 1970, but this chart shows that employment rose even faster: the self-employed share of all those employed has been declining for 30 years:

 

 

We can attribute this trend to the rise of global Corporate America and government employment. The workforce expanded, and relatively more people became employees of corporations or the government than became self-employed.

 

It's important to note here that the BLS does not break down the income of unincorporated self-employed: if millions of self-employed saw their net incomes slashed in the recession, the BLS still counts them as self-employed. So a consultant who earned $100,000 prior to the recession and now scrambles to net $10,000 is still self-employed.

 

This is the statistical equivalent of 6 million people losing full-time jobs and then 4 million of those people getting part-time jobs. Did employment truly recover most of the losses?

 

This chart displays total non-farm employment (blue) and the incorporated self-employed. Unsurprisingly, the rise and decline of the incorporated self-employed tracks the general economy and total employment.

 

 

But once again we have to note the limitations of the data. As B.C. observed, some of the recent rise in incorporated self-employed is the result of tax policies favoring corporations; the newly incorporated may well not have any employees, i.e. they are simply sole proprietors who incorporated for the tax benefits:

 

Historically, in order for incorporated self-employment to grow, it requires an increasing share of the population that is inclined to, or capable of, first becoming unincorporated self-employed. A growing share of the incorporated self-employed since the '00s are one-person S corporations (to take advantage of favorable tax treatment) or limited partnerships (LPs) and limited liability corporations (LLCs) in real estate for pass-through purposes that hire few, if any, employees.Consider that the US employment base is disproportionately dependent upon the viability of as few as 4% of the labor force and fewer than 2% of the population as the primary "job creators", i.e., incorporated self-employed.

After a brief increase in 2012, the self-employed as a share of total employment is falling off a cliff:

 

United States’ new business formation rate continues dropping steadily

 

Spend some time walking through Silicon Valley or New York City, and you’ll likely leave under the impression that entre­pre­neur­ship is alive and well in the United States. But spend some time wading through some of the latest census data, and you may come away with a very different impression.

This trend is reflected in the decline of small business in general:

 

 

Although many analysts claim most employment growth now comes from corporations, once again we have to look beneath the surface and ask what kind of jobs are corporations creating? More part-time fast-food positions?

 

Small business plays two critically important and often unrecognized roles. One, it tends to give new workers their first employment experience. The corporate human resources departments are not so forgiving--have you had your third interview yet? Only two more to go....

 

Two, small business tends to train workers who are then able to move up the job ladder to better paying corporate jobs, having learned the ropes at a small business. If you talk to corporate insiders, they will admit (in private) that their own job training efforts are limited: it's faster and more productive to poach your new hires from a competitor than invest years bringing up new talent.

 

Corporations may point to their intern program as "job training," but this is all too often a PR facade for unpaid slave labor. How many interns learned anything remotely useful? How many end up with full-time jobs at the company? The typical answer is: very few.

 

Small business is the incubator of employment. As it declines, so too do opportunities for first jobs, second chances and economic independence.

Comments

[Umh]

You need lawyers, accountants and bribes to do business in a world of big government.

[Cthonic]

People wondering why there is a decline in SME and self-employment; here are six things involving economies of scale:

1) domestic regulatory burden - rising, fixed compliance costs impute a minimum firm size for any particular undertaking,

2) legal liability - single frivolous lawsuit can ruin a firm, unquantifiable risk,

3) relative lack of access to credit/capital - people already tapped out with homes, cars, student loans can't access credit for productive purposes, while larger publicly traded firms can issue debt out the wazzoo at historically low interest rates,

4) marginal cost of (foreign) labor - profit margins severely compressed by larger competitors able to leverage lower foreign labor costs,

5) reliability - customer's real or perceived risk of dealing with what might be a fly by night entity,

6) info paradox - more market information means profitable niches in the economy invite competition earlier.

[Lugnut]

I guess all of those old ex-AT&T blow out refugees from the break up who always peddled themselves as half assed process amanagement consultants finally ran out of small businesses to leech off of.

[onlooker]

I have worked corporate with decent income and also started 6 businesses of which 3 made it with modest income. There were 3 failures which cost me time and money. The 3 that worded out were situations of taking advantage of an opportunity (seeing the opportunity and taking the risk). Three years ago, at 71 years, I eased into what has become an ideal low intensity job that provides some badly needed income.

Having done this for decades, I encourage anyone to “you didn’t do this by yourself” to do it yourself or with any help available.  These are some mistakes and downsides.

1. You must know the game and if you adventure(verb now) into an unknown you must do it part time and with next to zero $ risk.
2. Being the boss means you sweep the floor, work until the job is done regardless of the hours. Expect 60 to 80 hour weeks.
3. Used to, you could do work that white boys and then others thought themselves above. Mexico has taken that advantage lower, however skill with the English language is an advantage.
4. Buying an existing business usually does not work. If it could, you can do it from scratch. Cooked books are the first thing to do if a business is to be sold. Beware.
5. Dont partner up unless the other person has assets that you do not have and they are absolutely necessary. Best advice is Dont partner. 90% down side.

IMO there are several reasons that small business is contracting.

1. The housing bubble went belly bubble up. It did replace dot com bubble for a bit.
2. Banks will not loan $ for small business either established or start up.
3. Small business is not unionized and the Unions hold big sway with this government.
4. Large business wants it all and will destroy or gobble up even the little guy to continue total ownership.
5. In schools, wood shop, metal shop and other mind/hand skills are not being taught and the kids are not taught to think for themselves (think Unions/Liberal).
6. 98% of small business has conservative political agenda. Think Tea Party and Demon Republicans.

And last, if you talk to small business owners the common thread of lament is that the kids do not have a set of ethics.

I am not sure that the kids should be blamed for lack of ethics. If you look at the government leadership, media, school standards, and not unimportant is the education system of the TV and Hollywood.

It is difficult to teach and ingrain ethics after the kid get out of high school. If you look at the weekly body count of Chicago, the 25% drop out rate of Los Angeles it is clearly apparent that the ethics of rural America “clinging  to their religion and their guns”  is not the problem with America as Obama decried and demonized.