THE GREAT POOL OF THE AMERICAN SELF EMPLOYED

In our evolution in executive search, we have supported a great variety of industries.

As a result, we have a fair understanding of a considerable cross section of the American workplace and workforce. From this base of experience, we have addressed several articles on the seemingly intractable nature of today’s unemployment crisis.

The following article will address the Great Pool of the American Self Employed.

We will show that the scope and impact of this pool has been, through time, severely underestimated.  It is our hope that with the new – and as yet unpublished - numbers introduced below, researchers as well as policy enthusiasts from within and outside government will enjoy a revised and refreshing perspective of employment in America.

Make up of the Pool:

It is, perhaps, a common assumption that the self employed are self employed because they couldn’t find or hold a (real) regular job.

Of course, in the Great Pool there are those that might be considered as belonging to this group. These workers are classified as “self employed” for “economic reasons”. (See BLS Current Population Surveys)

Of approximately two thirds of the total self employed pool (the unincorporated self employed) about 11.3% reported they were self employed for economic reasons.  Of the remaining third of the pool (the incorporated self employed) 8.2% reported entering the pool for economic reasons.

On the other hand, about 85.3% of unincorporated self employed and about 87% of incorporated self employed report that they are self employed by choice, for life style, for “personal reasons”.  They are self employed because they enjoy being their own boss, prefer the flexible hours, the challenge and the possibility that they may live to enjoy the American dream. These numbers are slightly higher for women than men¹.

Size of the Pool

How many Americans are in this pool?

The Bureau of Labor Statistics (BLS) reports monthly on the size and make up of the pool of self employed.  Their most recent estimate is that the pool stands now at about 15.7 million workers.  This represents about 11.3% of America’s total work force.   As mentioned above, about two thirds of this pool are unincorporated, Schedule C filers, and about one third of the pool are incorporated, 1040 filers.  However, it is important to note, that though this second group has incorporated (reasons vary) they, none the less, report their status in the CPS as “self-employed”.

When assessing the total impact of this pool on the American labor force, however, these numbers are only a beginning. To determine the total labor force impact of the self employed, one needs to ask, how many workers do the self employed employ?

This question and its answer are not as simple as they may appear.  If for example, a Schedule C filer (a sole proprietor) employs two people in addition to him or herself, these employees are 1040 filers and do not, of course, appear in the published BLS statistics as “self employed”.  The IRS Statistics of Income Division counts them as well- and of course they should- in the 1040 pool.  The IRS, apparently, has no way to assess how many employees the self employed employ.

Nor does the Office of Advocacy of the Small Business Administration (SBA), the office in which the SBA’s economists reside. How many workers do the self employed employ?  They, like the IRS, could provide neither a number nor an estimate².

The answer to the above question, however, has now come to us from as yet unpublished  BLS data.  Please see the tables below.

TABLE 1

(unincorporated self employed in thousands)

TABLE 2

(incorporated self employed in thousands)

We see from TABLE 1 above, that the total of unincorporated self employed as of lasts year stood at about 9,801,000.  Of these, 1,330,000 reported having one or more employees. When multiplied out, these 9,801,000 unincorporated self employed employed  5,989,000 employees³.

We see from the above TABLE 2 that the incorporated self employed numbered about 5,065,000.  Multiplying out in the same fashion as with TABLE 1, we find that the incorporated self employed, though only about one third of the total pool, employed about 26,496,000 workers⁴.

By adding the totals calculated from TABLES 1 and 2, we find that the self employed employ about 32,485,000 workers, most of whom file 1040 forms⁵. By adding this number to the 15,770,000 of the self employed pool, we find that the total impact on employment of the self employed – themselves plus those they employ – totals about 48,255,000 workers. Assuming the current workforce to be about 138,100,000 (2009 forth quarter CPS data), these 48,255,000 workers represents 34.9% of the American workforce.

Strength of the pool

The unemployment rate of the self employed currently stands at 6.2%, up from 3.5% in January 2007. (These figures were provided by the Heritage Foundation.) This is considerable less than the 9.9% recently floated as the unemployment rate for the labor force as a whole.

However, there has also been a considerable decrease in the number of those employed by the self employed during these same years. This decrease can be seen by comparing the aggregate numbers (from Table 1 above) for 2007 and 2009⁶. And, if the decrease is expressed as a percentage (an unemployment rate), it would be considerably higher than the 9.9% given as the rate of unemployment of the aggregate labor force.

In fairness, however, we note, that this 9.9% is a deceptive number. A true representative number of unemployment in the total workforce would be a considerable higher number⁷, a number comparable to the rate of unemployment of those who were employed by the self employed and have since left their ranks.

On the other hand, one must also consider when evaluating the strength of the self employed pool that the number of labor hours one may report and still be concerned as an “employed self employed” is decidedly lower than the number of hours a salaried employee may report and be considered as employed. (These numbers are readily available from BLS tables.)  However, even given that, the Statistics of Income Division of the IRS reports that the aggregate income of the self employed (Schedule C filers) continues to grow and, according to the IRS, the raw numbers representing those in the pool have increased as well.

We see from the above that the Great Pool and those they employ number over a third of the entire work force   And that is just the beginning. In our next article, we will discuss the impact of self employment on job creation across the entire spectrum of the American market place.  We will show that employment in America has in the past and will in the future depend largely on the strength, dynamism, diversity and creativity of America’s entrepreneurial self employed.

[1] 3-4% provided no categorical reply

[2] The SBA tracks firms with 500 employees or less and does break out statistics for firms of 20 or less. However, they do not ask which of these firms were founded and currently owned and managed by sole proprietors.

[3] These figures are current as of 2009

[4] The numbers for the incorporated self employed were last assembled in 2005 and, as a result, are not as current as the numbers representing the unincorporated self employed. However, since the number of incorporated self Employed has remained fairly constant, about 5M since 2005, the numbers relative to those they employ may still be accurate in so far as in all likelihood their numbers would have increased considerably from 2005-2007 and then, with the economy’s collapse, would have fallen back again to 2005 levels.

[5] Some may themselves be “self employed” if their employment is on a contract basis

[6] Though there are no recent figures in regards this same issue amongst the incorporated self employed, we presume, as mentioned above, that this sector of the self employment pool has taken, during these years, a considerable hit as well – a hit comparable to the unincorporated self employed.

[7] The numbers needed to determine a more representative unemployment rate are readily available from BLS tables, but that discussion is beyond the scope of this paper.