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Recession Isn't the Only Thing Hurting the Self Employed

Self-employment in America dropped to its lowest level in eight years this August, leading many observers to single out the recession as the reason.

The ranks of the self-employed plunged 13 percent last month, decreasing from the pre-recession record of 9.98 million posted in December 2006 to 8.68 million last month.

This stands in stark contrast to the usual trend during an economic slump where self-employment tends to increase as the newly unemployed start their own businesses. But this reversal of the norm can’t be solely laid at the feet of the recession, says Scott Shane, a professor of entrepreneurial studies at Case Western Reserve University in Cleveland.

“There’s a long term-trend over 50 years that self-employment has been going down,” he told BusinessNewsDaily.  The reality, he said, is that the recession didn’t cause this drop in the number of self-employed; it merely exacerbated an existing trend.  “I don’t see how we’re going to get a lot more people becoming self-employed,” he said.

What’s the engine driving this precipitous plunge in self-employment? 

A significant factor in this long-term decline, said Shane, is what he calls the “WalMart effect.” This describes how large enterprises are able to gain competitive advantage against smaller operations based on price, scale or efficiency and force them to exit the market.

“You used to be able to run a lot of business at a smaller scale,” he said. “We’ve seen that the smaller number of larger businesses can replace the larger number of smaller businesses .”

But we’re victims as well of our mythology about the role of the small company or self-employed entrepreneur in fueling the American Dream . Part of our problem in placing the current decline in perspective is our relentless economic optimism, which focuses more on those entering self-employment than on those exiting because they couldn’t make a successful go of it.

“We think about the entry side,” he said. “But the exit side is the part people forget.”

And we overlook the fact that these small companies and one-person shows actually destroy more jobs than they create. Really small companies, said Shane, create relatively few jobs.

“The biggest job creation is in large small businesses,” he said. When it comes to job creation, 400 employees trumps ten in growing new jobs.

The self-employed in particular are not a great source of new jobs. Today, Shane said, 80 percent of all businesses are non-employers.
“It’s a highly skewed distribution,” he said.

Ned Smith

Ned was senior writer at Sweeney Vesty, an international consulting firm, and was Vice President of communications for iQuest Analytics. Before that, he has been a web editor and managed the Internet and intranet sites for Citizens Communications. He began his journalism career as a police reporter with the Roanoke (Va.) Times, and was managing editor of American Way magazine and senior editor of Us. He was a Captain in the U.S. Air Force and has a masters in journalism from the University of Arizona.