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 favorable slant at the news . Because many folk go into business for themselves out of necessity when the economy is doing poorly and that they have few employment alternatives, this decline is fine, the reporters say. It signifies that the roles market is doing better.
There’s an issue with this interpretation; it ignores the continuing decline inside the variety 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 work Statistics data reveal . Moreover, the variety of self-employed Americans declined both in the course of the Great Recession (once we lost 831,000 self-employed people) and subsequent recovery (once we lost an extra 531,000). That’s very different from what’s happened to employment. The variety of employed Americans increased by greater than 4 million people between 2009 and 2013.
The problem with the positive spin at the KIEA is that it looks only at one portion of the image – entry into self-employment. However the collection of self-employed people is stricken by both entry into and exit from self-employment. Just like the water on your bathtub, the variety of self-employed depends upon both inflows and outflows.
Using the figures reported within the KIEA, I created annual estimates of the variety of people getting 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 work Statistics for those years to work out 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 nice Recession, the collection of people entering self-employment rose by 441,000. But then, from 2009 to 2013, when the economy expanded again, the choice of people going to work for themselves decreased by 574,000.
But, as you most likely know, exit from self-employment is cyclical. In the course of 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 point. During subsequent recovery when the economy was expanding again, the choice of people giving up self-employment declined by slightly greater than 1 million people.
Because economic conditions don’t affect entry into and exit from self-employment equally, the side effects on self-employment have outweighed the placement ones in both the recession and the recovery. In this case, selection of self-employed people declined 5.4 percent in the course of the Great Recession and a further 3.7 percent in the course of the subsequent recovery.
The indisputable fact that the selection of self-employed Americans has continued to fall in the course of the recovery shows that something is amiss. Fewer people entering self-employment may signal that labor markets have become better. However the absence of bigger declines inside the selection of people exiting self-employment signals that economic conditions are still not good for those in business for themselves.
Rather than putting a good spin at the decline within the rate of entry into self-employment, the media and pundits must be specializing in the core problem: Why are we still seeing declines within the number self-employed Americans five years into the industrial recovery?