“In theory, there is no difference between theory and practice.  In practice there is” Yogi Berra

The most watched measure of unemployment in America is the Official Unemployment Rate announced periodically by the Bureau of Labor Statistics (BLS).  Typically, as unemployment increases, the rate goes up triggering intense political and media focus.

That the rate goes up as unemployment increases is true in normal times, but, perhaps, not in our times.  In our times, as workers leave the work force at accelerated rates, the unemployment rate, paradoxically and counter intuitively, actually may go down.

Now we are assured by the BLS that though this may be so, the rate of decrease will not be statistically significant and that it would be statistically improbable that enough workers would flow out of the labor market to trigger a significant downward pressure on the unemployment rate.

We question this assumption.  To begin with, last year the outflow tripled.  Should this year’s labor market performance repeat last years, this outflow would triple again and would number about 3.6 million of the formerly employed.  The resulting numbers would look like this:

Divide the current number of unemployed, 15,260,000  by the current total civilian labor force 154,715,000 (employed plus unemployed). This provides the current rate of .986 or 9.9%.  Now subtract the 3.6 million mentioned above from the unemployed pool and we are left with an unemployed pool of 11,660,000.  Divide this number once again by the new total labor force (154,715,000 minus 3.6 million) or 151,115,000 and the new rate is 7.7%.

Might this happen?  Might the outflow from the labor market triple again? It very well may, as the below tables will help to demonstrate.

Table 1

(The above table from the BLS shows the duration of unemployment in weeks of those counted as unemployed. )

We see from the above table (table 1) that the overwhelming number of unemployed have been unemployed for over 15 weeks.  We also see that this number has grown dramatically from April of last year to the present:  From 6,857,000 to 8,969,000.

We also see from this table that the number of those unemployed for 27 weeks or more has more than doubled over the past year as well: from 3,901,000 to 6,716,000.

Additionally, the BLS reports (not shown on the above table) that the numbers of formerly employed who are now only “marginally” attached to the labor force (BLS nomenclature), and no longer counted amongst the unemployed, now stands at about 2.4 million up from 2.1 million a year ago. Those classified as “discouraged” workers, workers who haven’t applied for a job in the past 4 weeks and, as a result, are also no longer counted as part of the work force, has increased three fold over the past year, from 457,000 a year ago to 1.2 million today.

The clear implication of the above trends is that as we slug through the trough of this great recession, more and more of the formerly employed may become unemployed for longer and longer periods of time and, as a result, may, eventually, drop out of the labor market.  These former workers will join the pools identified by the BLS as the “marginally” attached or “discouraged” workers pools, the pools of the no longer counted.

To give us a taste of what might happen, the fact that the no longer counted do count, we bring you to March 2010.  In March, the unemployment rate stood at 9.7%.  Then, about 805,000 formerly “discouraged” workers, feeling that the economy had improved, reenter the job market to look for work.  Because of their reentry into the job market, they were again counted as “unemployed looking for work” and because of this, the official unemployment rate shot up to 9.9%.

Presumably, should these workers   once again become “discouraged” and withdraw from the job market  (perhaps for four weeks, they may know of no where to apply), they will again no longer be counted as “unemployed”,  and the official unemployment rate will drop again to 9.7%.  In other words, as workers leave the labor market, the official unemployment rate would go down!

We mentioned this to the BLS and they cautioned us not to put to much stake in these short term fluctuation. Presumably, the market will right itself and, once again, perhaps in the long haul, the rate will go down when unemployment goes down.  Our point, however, is that we may be entering a new labor market reality, a reality where the traditional calculation of the unemployment rate simply may not work and may, in the long haul, reflect the opposite of what is actually occurring in the labor market.

That this may be the case is entirely the result of how the BLS defines unemployment and who is counted in that pool.  And though the BLS nomenclature makes academic sense, it does not make common sense and may, in our times, lead to statistical nonsense.  This phenomenon may very well become more and more exacerbated as time goes by.

The BLS does publish unemployment rates other than the official rate which do include a broader range of former workers into the pool of unemployed.  One such rate is the U6.  But who, aside from policy specialists and labor economists, has even heard of U6?

The official rate is, by and large, the only one quoted in major media.  It is the American Rate.  And it is not stated with disclaimers or fine print.

That the official unemployment rate may provide a severe distortion of employment in America can only be corrected by a change in the way the BLS reports its official rate.  By sticking to their historic definitions and equations, they may very well be doing us all a great disservice.

The central issue faced by the labor market is that in our times the unemployed are unemployed for longer and longer periods of time – long enough to become discourage and “drop out” of a narrowly defined labor market.  The following are the trend numbers which represents the percent of workers unemployed for over 27 weeks:

4/2009     12/2009      1/2010     2/2010     3/2010     4/2010

27.5%      39.8%        41.2%      40.9%      44.1%     45.9%

And though a percentage of the unemployed may become employed and a portion of the discouraged may from time to time reenter the labor market, the aggregate numbers over time show that the pools of the marginally attached and discouraged continue to dramatically increase.

And, since the job market options on American soil may simply not improve, alternative measurers of unemployment need to be mainstreamed so that all – citizens and their representatives – are aware of the extent of our labor problem.  U6 is currently at about 18%.  And though this number may not be as precisely defined as other BLS measures, it is far closer to what is going on out there then the official rate.

“The future ain’t what it used to be.” Also Yogi Berra

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.

In order to accomplish this firms employ, essentially, two strategies: (1) acquisition of a firm or firms already in these markets or (2) acquisition of senior personnel with strong programmatic skills and customer relationships in the market the firm wishes to penetrate.

If your firm is acquired

1. If you are part of an acquisition, and one motivation for the acquirer is to enter a new market, ask yourself, “To what extent am I instrumental to this effort? Do the programmatic skills and customer knowledge on which this acquisition depend reside, at least in part, in me or do I play a support function?

If you are critical to the venture you should feel somewhat secure in that it is for you, at least partially, that the acquirers have spent their money.

On the other hand, regardless of what you may be told, if you are not critical to the new venture – start looking for a new job. Generally, in an acquisition, all non-essential administrative personnel relative to the new market entry are let go.

2. If you have strong programmatic skills and customer relations in a particular market, and a firm wishes to acquire you to penetrate that market, ask the following in your interview:

a. Why did you select this market to penetrate?

b. What volume of new business from this new market would you consider a win?

c. What time frame would you consider for this win?

d. Do you at present have programs in tangential markets that would help to provide “quals” in the offices you wish to penetrate or help to establish confidence in a potential customer?

e. What personnel already on board could be matrixed to this effort?

The above questions have a dual value: The answers may give you the confidence you need to choose this employer as a new vehicle for your career. It’s your market so you should know: Is this firm realistic? Do they have a chance? Secondly, if you ask these questions, the company will know that you are a serious player. It will advance your candidacy.

Changing industries might open additional doors for the job seeker, but for only those job seekers in the most generic of disciplines, i.e. those with the most generic set of skills closest to entry level.

This was conclusively demonstrated in the early Nineties, with the fall of the Soviet Union and the resultant shrinkage of the defense industry. At that time, one of the senior advisors to Insight Executive Search was encouraged by the Department of Defense to help devise a strategy that would create a smooth transition for Pentagon engineers into the private sector.

It did seem as if this would work. The underlying physics, electronic theory and computer technology – the underpinning of major sectors of both industries – were, of course, the same. However, in practice, the differences between the two industries proved insurmountable: product development, culture and the “mystic” of each camp were polar opposites and, for the most part, engineers from the defense sector remained unemployed.

And then, of course, there was market value. An electronic engineer with ten years experience in the defense world was only incrementally more valuable to the commercial world than a recent engineering grad with a couple years of commercial experience, yet the 10 year defense engineer would cost the new employer about 40% more. Even those 10 year engineers who were willing to work for 40% less were not hired. No one wants to pay a new hire 40% less then his last job.

All the above applies directly to the social scientist. Though currently, some researchers in education are beginning to apply some of the cost/benefit methodologies and technologies employed by researchers in health economics, and though some of these forms of analysis are similar, it is most unlikely, that an education researcher would by hired as a health economist and vise versa. The program and policy histories, colleague networks and the customers are different.

And so, though we frequently hear, “I’d like to try something new”, your market value is in your current field of experience.

If individuals can not make a transition – can firms? Yes, of course. But, what do they do? They hire senior players with considerable programmatic experience and customer savvy in the field they wish to get in to.