On Their Own

by Cameron Macht - cameron.macht@state.mn.us
December  2010

Economic Building Blocks

Especially in a recession, “entrepreneurs” and “small businesses” are often touted as the engine of job creation in the United States and therefore attract the focus of media attention, political campaigns, and economic development organizations. Many people quote the statistic that half or two-thirds or even three-fourths of job growth come from small businesses. According to a recent report from the U.S. Small Business Administration (SBA), small businesses actually “accounted for all of the net new jobs” in the United States.[1] Unfortunately, there are many definitions – and more importantly, perceptions – of who or what constitutes a small business or entrepreneur.

But the definition of small business is critical in properly understanding and using that oft-quoted statistic. According to the SBA any firm with fewer than 500 employees is considered a “small” business. By that measure, however, nearly all American businesses are small; and in rural regions there are so few employers with 500 or more employees that even fewer people would accept that definition of a small business.

Instead, the basic building block of entrepreneurship and small business is the self-employed individual. There were more than 21 million self-employed businesses in the United States in 2008, generating almost $1 trillion in sales receipts. Locally, there were 376,397 in Minnesota, reporting sales of more than $15 billion, accounting for about 7 percent of the state’s gross domestic product in 2008.

Nonemployer Statistics

Despite their importance, not much is known about self-employed businesses. One of the best sources of data is the U.S. Census Bureau’s Nonemployer Statistics program. Originating from tax return information from the Internal Revenue Service (IRS), the Nonemployer Statistics program is an annual series of information about businesses that do not have any paid employees and are subject to federal income tax. The most recent nonemployer statistics available are for 2008, with detailed data going back to 2002.

According to the U.S. Census Bureau “most nonemployers are self-employed individuals operating very small unincorporated businesses, which may or may not be the owner’s principal source of income.”[2]  Although these firms are excluded from most other business statistics, nonemployers account for a majority of business establishments, including more than 70 percent of all businesses in the U.S. and about 13.7 percent of total jobs (each self-employed individual counts as one job in the total number of jobs data from the U.S. Census Bureau).

Likewise, nonemployers account for more than 69 percent of the businesses in Minnesota but just 12.3 percent of total jobs. Comparisons can be made using data from the Minnesota Department of Employment and Economic Development (DEED) Quarterly Census of Employment and Wages (QCEW) program, which is data only on business establishments with paid employees covered by unemployment insurance (UI). The most recent QCEW data are updated through 2009, but in order to compare them to the nonemployer statistics from the Census Bureau and the IRS, annual data from 2002 through 2008 were used for this article (see Table 1).

Counter-Cyclical Growth

The state suffered small employment declines following the 2001 recession. From 2003 to 2006 Minnesota’s employment expanded just over 1 percent each year, before falling again at the start of the Great Recession, which officially began in December 2007. In sum, Minnesota’s employers added nearly 100,000 covered jobs (jobs covered by unemployment insurance, which does not include self-employed individuals) between 2002 and 2008, a steady 3.7 percent growth rate.

In comparison, Minnesota gained 43,125 net new self-employed businesses between 2002 and 2008, a 12.9 percent increase. This made self-employment a bigger part of the employment picture in the state, bumping up from 11.4 percent of jobs in 2002 to the 12.3 percent recorded in 2008.

Interestingly, the biggest jump in self-employment occurred from 2002 to 2003, while Minnesota’s economy was still recovering from the 2001 recession and employers were still cutting jobs (-0.4 percent). The implication is that individuals were more willing – and able – to strike out on their own when there were fewer job opportunities available.

Strong nonemployer growth continued through 2006 until year-over-year UI-covered job growth (+1.5 percent) was at its peak in the state. After averaging more than 13,000 net new self-employed businesses each year from 2002 to 2005, the state gained just 3,445 nonemployers from 2005 to 2006, coinciding with the fact that jobs were easier to find at traditional employers. Then as the economy and UI-covered job growth slowed again in 2007, self-employment jumped again, adding more than 10,000 nonemployer establishments from 2006. As noted, the recent pattern seems to show that self-employment increases faster when UI-covered job growth is slower (see
Figure 1).

However, in the first year of the Great Recession Minnesota lost about 10,000 self-employed businesses – essentially wiping out the last year of growth. Detailed data are not available for 2009 or 2010 yet, but it will be interesting to see if self-employment again increased as employers cut jobs, forcing workers to look for alternative options. DEED’s QCEW program shows that covered employment declined 5.6 percent from the first quarter of 2008 to the first quarter of 2010 – which was far more severe than the 2 percent drop from first quarter 2001 to first quarter 2003.

Industry Employment Statistics

Although the typical image of an entrepreneur is of a person tinkering in his or her garage, working on an idea that will eventually become the next Medtronic [3], manufacturing is really not a major industry for self-employment. Instead, half of all self-employed businesses are found within four industry categories:

• Professional, scientific, and technical services
• Other services
• Construction
• Retail trade

Add in health care and social assistance; real estate, rental and leasing; and administrative support and waste management and remediation services, and those seven industries account for 75 percent of the self-employed businesses. Manufacturing accounts for less than 2 percent of nonemployer establishments in the state (see Table 2).

 The largest industry for self-employment was professional, scientific, and technical services, accounting for 14.5 percent of all nonemployer establishments. Speaking of accounting – accounting, tax preparation, bookkeeping, and payroll services accounted for 10 percent of self-employed firms, while management, scientific, and technical consulting services provided 22 percent of these nonemployers. Entry into the industry appears easy, with the sector gaining more than 8,000 nonemployers from 2002 to 2008, a 17.6 percent jump. People with expertise in these fields are able to set up shop quickly, gain customers, and start earning money.

The next largest industry was other services, which includes:

• Personal care services like hair salons, barber shops, and nail and skin care services
• Automotive repair and maintenance shops
• Personal and household goods repair and maintenance
• Pet care services

Although often overlooked in business statistics, these nonemployers are often the most visible on main streets in small towns throughout the state, especially in rural regions. More than 5,000 self-employed businesses in other services popped up from 2002 to 2008, an 11.8 percent increase.

Construction was the third largest industry for self-employed individuals in the state, primarily specialty trade contractors like framers, roofers, finish carpenters, plumbers, electricians, and other building equipment contractors. During Minnesota’s residential housing boom in the early 2000s, construction was one of the fastest growing industries in the state. From 2002 to 2007 the number of construction nonemployers increased by almost 9,000 net new self-employed businesses, a 22.6 percent buildup; then in the next year one-fourth of that growth was torn back down as the housing market stalled.

Likewise, the retail trade industry saw a huge decline from 2007 to 2008 as consumers cut back in the face of the recession. Nearly twice as many self-employed retailers disappeared in the last year as the state gained in the previous five years (+1,432 retail trade nonemployers from 2002 to 2007, -2,634 from 2007 to 2008). While this includes some mom-and-pop-type retail stores, more than half (54.5 percent) of these nonemployers are nonstore retailers, which includes in-house and door-to-door direct selling (i.e., Avon, Mary Kay, Tastefully Simple, etc.) and vending machine operators.

The same phenomenon also affected the real estate and rental and leasing industry, which had reported 16.8 percent growth (+5,387 nonemployers) from 2002 to 2007 before falling 11.5 percent in 2008 (-4,316 nonemployers). The industry was split almost evenly into thirds: a little over one-third of the nonemployers acting as lessors of real estate (i.e., lessors of apartment buildings, offices, storage units, etc.), one-third acting as real estate agents and brokers, a little under one-third working in activities related to real estate (i.e., property management, appraisals, etc.), and a small percentage operating rental and leasing services.

Regardless of the recession, health care and social assistance has been one of the fastest growing industries for UI-covered employment, but it was one of the slowest growing industries for self-employment. Three-fifths of the nonemployers in the health care and social assistance industry were operating child day care centers (20,189 nonemployers), while more than 5,000 other health practitioners – such as chiropractors, optometrists, and mental health practitioners – operated offices in the state, as well as more than 2,000 home health care services.

Counting the Counties

Sixty of the 87 counties in the state of Minnesota showed a net increase in employment from 2002 to 2008, as the state added 95,808 net new UI-covered jobs. In comparison, 77 counties gained nonemployers over that same time frame, leading to an increase of 43,125 self-employed businesses. Three-fourths of the counties (63 of 87) saw a faster increase in self-employed businesses from 2002 to 2008 than in covered employment, again showing the increasing importance of self-employment throughout the state of Minnesota.

Interestingly, smaller counties tended to have a higher reliance on self-employment for jobs. For example, nearly one in every four jobs in Clearwater County, which is the 13th smallest county in Minnesota, was self-employed. Cook, Lincoln, and Grant counties, which are among the 10 smallest counties in the state, all had more than 22 percent of their jobs at nonemployers. Half of these counties experienced population declines from 2002 to 2008, but all 10 gained nonemployers over that time period (see Table 3).

 In contrast, nine of the 10 counties in the state with the lowest concentration of self-employed businesses as a percentage of total jobs were either metropolitan or micropolitan statistical areas. As such, these counties tended to be regional employment centers and net labor importers, drawing commuters from surrounding counties to fill jobs at local employers. These counties had large numbers of self-employed individuals, but even larger numbers of UI-covered jobs, and were seeing growth in both categories.

Moving Quickly

Of the five counties that saw the fastest growth in self-employment from 2002 to 2008, four were also the fastest growing in population. Sherburne, Scott, Carver, and Wright counties led the state in both self-employment and population growth. Likewise, Isanti and Washington counties were also among the 10 fastest growing counties for both population and nonemployers in the state (see Map 1).

But a couple of smaller, more rural counties also cracked the fastest growing list for self-employment: Le Sueur County ranked fourth in the state with a 24.3 percent jump in  nonemployers; Todd and Carlton counties – which are both in northern Minnesota – gained nearly 22 percent, and Rock County – which is in southwestern Minnesota – expanded about 20 percent from 2002 to 2008.

You’re On Your Own

Self-employment was an increasingly important source of jobs in the state of Minnesota from 2002 to 2008, now accounting for about one in every eight jobs and seven in every 10 business establishments. The number of nonemployers jumped about 13 percent over that time frame, which was about three and a half times faster than covered job growth occurred.

Minnesota gained about 10,000 net new nonemployers each year, at least until the Great Recession hit in 2007, which caused a loss of 10,000 nonemployers through 2008. However, recent trends have shown that with fewer job opportunities at larger employers, self-employment is an attractive and viable option for some workers. When data for 2009 and 2010 become available, it will be interesting to see if self-employment again helped accelerate job growth in the state.

[1]“The Small Business Economy”www.sba.gov/advo/research/sb_econ2007.pdf
[2]Nonemployer Statistics. U.S. Census Bureau. www.census.gov/econ/nonemployer/index.html
[3]Medtronic: The Garage Years. www.medtronic.com/about-medtronic/our-story/garage-years/index.htm

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