The State Of Entrepreneurship

The rise in the rate of self-employment in the United States was largely ignored since the 2000 recession until its rapid growth in recent years. Today, it remains an important source of jobs for many Americans, making entrepreneurs out of many self-employed workers. Entrepreneurship on the other hand, plays a major role in job creation, which is an important issue to policymakers.

Much is known about how many workers in the US are self-employed, around 10% of the country’s 146 million labor force. However, little is known about the factors that surround it. This article attempts to answer some of the questions about the statistics of self-employment in the United States through the result of a survey conducted by the Bureau of Labor Statistics (BLS). It will provide details about the socioeconomic and demographic characteristics that created the self-employment numbers as a whole. It will also include data on incorporated and unincorporated self-employed, and the number of employees working for self-employed workers.

About the Survey

The Bureau of Labor Statistics, under the Department of Labor, conducts a monthly survey, called the Current Population Survey (CPS). Also referred to as the household survey, it provides employment and unemployment data for the country’s civilian, non institutional population ages 16 and older. It taps 60,000 households to gather the information it uses to represent the employment rate in the US.

Getting the Information

The CPS has been regularly collecting data on self-employment since the late 1940s. Back then, it only categorized self-employed workers according to the industry, which was only either agricultural or non-agricultural, that they belong to.

In 1967, the BLS survey started to include the unincorporated self-employed. It wasn’t only until 1995 that the survey added the incorporated self-employed category. Nearly two decades later in 2014, the number of paid employees that self-employed workers hired was included.

When the unincorporated self-employed workers were classified in the 1967 CPS, the only possible way to separate the number of incorporated self-employed workers was to consider them as wage and salary workers. They were anyway, legally employees of their own businesses.

To determine whether a self-employed worker is incorporated or unincorporated, the CPS asks the question

“Last week, were you employed by government, by a private company, a nonprofit organization, or were you self-employed?”

Individuals who say they were employed by government, a private company, or a nonprofit organization are classified as wage and salary workers. Otherwise, they are self-employed.

Self-employed respondents are then asked,

“Is this business incorporated?”

Individuals who respond with a yes are classified as incorporated self-employed, wage and salary workers. If the answer is no, respondents are classified as unincorporated self-employed.

To determine how many paid employees an unincorporated self-employed worker has, the following question is asked (since 1995 only):
“Do you usually have any paid employees?”
If the answer is yes, a follow-through question is asked

“Excluding all owners, how many paid employees does your business usually have?”

Then in 2014, incorporated self-employed workers were asked the same questions to determine the number of their paid employees.

Who are The Self-Employed Workers?
Based on the CPS, self-employed workers are

  • those who work for themselves – this means that they are not an employee, in one way or another, of the government, a private company, or a nonprofit organization.
  • those aged 16 or over.
  • Classified either as unincorporated or incorporated

Incorporated and Unincorporated Self-Employed
According to the BLS, incorporated workers, have established a legal corporation and typically employ others, such as small-business owners or entrepreneurs. Unincorporated workers on the other hand, have not established a corporation and often operate alone, such as freelancers.

Key Survey Findings

According to the US Bureau Labor Statistics, the self-employment rate in 2015 was 10% of the total US employment. That’s roughly 15 million people out of 150 million American workers. Based on the Current Population Survey, here are the key findings that make up the self-employment numbers in the US.
By Incorporation Status

Figure 1. Percentage distribution of self-employment by incorporation status, annual averages, 2015. Source: Self-employment in the United States. March 2016. https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/home.htm

Based on a compiled report of the CPS, there are more unincorporated self-employed workers in the US compared to incorporated self-employed workers (See graph above). Out of 15 million self-employed workers, only 9.5 million are unincorporated. This represents 63.4% of the self-employed American workers. This also means that 6 out of 10 self-employed workers are unincorporated.

On the other hand, 36.6% or 5.5 million out of 15 million self-employed workers are incorporated. Incorporation is a business strategy that allows entrepreneurs to receive benefits that traditional, corporate employees and businesses have such as tax considerations and limited liability. It also enables them to sell stocks and bonds in order to raise capital for further business development.

In reality however, the number of unincorporated self-employed workers has declined. This trend has been observed by the BLS since 1994 (See graph below). Generally, the decline in self-employment status according to incorporation status has decreased for the past two decades.

Figure 2. Self-employment rates by incorporation status, 1994-2015.
Source: Self-employment in the United States. March 2016. https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/home.htm

In 1994, the self-employment rate was at 12.1%. By 2015 however, it became only 10.1%. During this time, the unincorporated self-employed workers declined from 8.7% to 6.4%, whereas the incorporated self-employed increased from 3.2% to 3.7%. (See chart data below)[table id=1 /]

There are three reasons as to why there are less unincorporated self-employed workers today than 20 years ago. A large share of self-employed workers is under the category of agriculture. However, according to the report by Steven Hipple and Laura Hammond, authors of the Self-employment in the United States (A Spotlight on Statistics), the decline in the number of unincorporated self-employed workers can be attributed to the decreased employment in the agricultural sector. In relation to this, while 97% of farms in the US are family-owned, majority of these farms are increasingly becoming operated by large companies. This meanwhile, is according to the U.S. Department of Agriculture’s National Agricultural Statistics Service (NASS).

On the other hand, Hipple and Hammond’s report cite the general increase in entrepreneurs incorporating their businesses as the third reason why unincorporated self-employment is on the decline.

Per State
There are 21 states in the US that have high self-employment rates. Some are even higher than the national rate (10.1%). The remaining 29 states, including Alaska and Hawaii, have rates lower than the US rate. (See graph below)

Figure 3: Self-employment rates by state, annual averages, 2015. Source: Self-employment in the United States. March 2016. https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/home.htm

Of the 21 states that have high self-employment rates, Montana has the highest rate with 16.1%, while Nebraska has the same rate as the national one. On the other hand, of the 29 states with low self-employment rates, Hawaii is on top with 10%, while Alabama with 7.5% is at the bottom. (See chart data below)[table id=2 /]

By Age
According to Hipple and Hammond’s report, there are more older people, aged 65 and over, who are self-employed compared to their younger counterparts. (See graph below)

The BLS report cites two reasons why there are more self-employed workers aged 65 and older. This age demographic has the greater capacity to accumulate wealth. At the same time, they have gained enough managerial skills, which is crucial in starting a business. Younger self-employed workers on the other hand, still have to acquire these resources either through business loans (wealth) or personal efforts (skills).

Figure 4: Self-employment rates by age, annual averages, 2015. Source: Self-employment in the United States. March 2016. https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/home.htm

Based on a table shown in the report (see below), self-employment rate for unincorporated businesses is at the 15.5%, which is the highest, for workers aged 65 and over. The lowest rate meanwhile, is for workers aged 16 to 24, which is at 1.9%.

Incorporated self-employment rates on the other hand, were lower for all age groups. (See table below). Despite this, the rates increased with age – from 0.3% for workers aged 16 to 24, to 8.6% for workers aged 65 and older.

[table id=3 /]

By Gender

Figure 5: Self-employment rates by gender, annual averages, 2015. Source: Self-employment in the United States. March 2016. https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/home.htm

Men have a higher self-employment rate at 12.3% compared to women at 7.5% only. (See chart above).

Men also have a higher unincorporated self-employed rate, at 7.4%, compared to women at 5.2%. Women also have a lower incorporated self-employed rate, at 2.3%, compared to men at 4.9%

By Race and Ethnicity

Hipple and Hammond’s report reveals that self-employment by race and ethnicity is dominated by Caucasians. This also means that Hispanics, Asians, and Blacks are less likely to start their own businesses. (See chart below). Caucasians make up 10.9% of self-employed workers in the US. Asians followed with 9.6%. On the other hand, 8.3% of Latinos or Hispanics are self-employed, while Blacks have a 5.2% self-employment rate. However, the order changes if the incorporation status is considered.

Figure 6: Self-employment rates by race and ethnicity, annual averages, 2015. Source: Self-employment in the United States. March 2016. https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/home.htm

Caucasians continued to be on top of the unincorporated self-employment rate with 6.9%. It is followed by Hispanics or Latinos with 6.4%, Asians with 5.6%, and African Americans with 3.6%.

As for the incorporated self-employment rate, Caucasians and Asians shared the top spot with 4% each. It is followed by Hispanics or Latinos with 1.9%, and African Americans with 1.6%.

[table id=4 /]

By Origin

However, by considering the origins of self-employed workers in the US, and not their race or ethnicity, it is revealed that foreigners are more likely to operate their own business. (See chart below). Foreign-born self-employed workers make up 11.2% of the total numbers of self-employed workers in the US, while US-born self-employed workers are only 9.8%.

Figure 7: Self-employment rates of the foreign born and native born, annual averages, 2015. Source: Self-employment in the United States. March 2016. https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/home.htm

As for the incorporation status, there are more unincorporated self-employed workers for both demographics – foreign-born with 7.6% and U.S. native-born with 6.1%, than incorporated self-employed workers. Incorporated self-employment rate was a bit higher with US-born self-employed workers (3.7%) compared to foreign-born workers (3.6%).

Other Findings

The Self-employment in the United States (A Spotlight on Statistics) by Steven Hipple and Laura Hammond, also included other findings in their compiled report.

Educational Attainment

According to the report, self-employed workers have a variety of educational attainments – from those with less than a high school diploma to a doctoral degree. However, workers with a professional degree have the highest self-employment rate at 21.3%. Workers with a master’s degree on the other hand, have the lowest self-employment rate at 9.3% only. (See chart below)

Figure 8: Self-employment rates of by educational attainment, annual averages, 2015. Source: Self-employment in the United States. March 2016. https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/home.htm

Incorporated self-employment rates on the other hand, were highest for those with a professional degree at 12.2% and lowest for those less than a high school diploma at only 2.1%. Unincorporated self-employment rates meanwhile, were highest for those with less than a high school diploma at 10% and lowest for those with a master’s degree at 5.2%. (See table below)

[table id=5 /]

For War Veterans
According to Hipple and Hammond’s report, it is more likely for veterans (12%) to be self-employed than those who did not serve (10%) in any of the wars that the US participated in. (See graph below). Of these veterans, the ones who served in WWII, Korean War, and Vietnam War have the highest rate at 24%, while Gulf War II veterans have the lowest self-employment rate at 4.5% only.

Figure 9: Self-employment rates by veteran status and period of service, annual averages, 2015. Source: Self-employment in the United States. March 2016. https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/home.htm

[table id=6 /]

As for the incorporation status for self-employed veterans, there is more unincorporated workers (7.1%) than incorporated workers (4.9%). (See table above)

By Occupation
The self-employment statistics report also revealed that self-employed workers are working in a wide variety of occupations in different industries and sectors. (See graph below)

Figure 10: Self-employment rates by occupation, annual averages, 2015. Source: Self-employment in the United States. March 2016. https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/home.htm

However, the rate of unincorporated workers remains high with a total of 63.2%. Of this said rate, construction and extraction workers have the highest unincorporated rate at 14.8%, while office and administrative support workers have the lowest rate at 1.4%.[table id=7 /]

On the other hand, incorporated workers have a total rate of 32.5%. From this rate, production workers have the lowest incorporated rate at 1.1% only, while management and business workers have the highest incorporated rate at 8.9%.

Paid Employees
Finally, the statistics report examined the number of paid employees that self-employed workers have.

Figure 11: Self-employment rates by number of paid employees, annual averages, 2015. Source: Self-employment in the United States. March 2016. https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/home.htm

According to the report, there are 14.3% of unincorporated self-employed workers who have their own paid employees, while data is not available for incorporated workers. In addition, 70% of unincorporated workers have 1-4 paid employees.

On the other hand, the report also examined the rate of paid employees according to gender, race, and ethnicity. (See table below)

[table id=8 /]

According to the report, unincorporated workers hired more men (17.5%) than women (9.2%). It also showed that incorporated workers hired more men (45.5%) than women (33.9%). On the other hand, both unincorporated and incorporated workers hired more Asians (51.3%) than any other employees of race or ethnicity.

Conclusion

The Harvard Business Review reported in 2014 that the number of self-employed, independent workers in the US will increase to 70 million by 2020. This is according to a survey designed by Emergent Research and sponsored by MBO Partners, a leading management services provider for independent professionals in the US. This is significant because the number will soon represent 50% of the American workforce – an explosive growth that will instigate law and policy makers to create better regulations for small businesses and self-employed workers. This also means that the push to create more flexible work schedule and environment will become better for both start-up entrepreneurs and self-employed workers.

References:

  1. Self-employment in the United States. March 2016. Steven Hipple and Laurel Hammond.
  2. https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/home.htm
  3. https://www.sba.gov/blogs/resources-veterans-start-your-veteran-owned-small-business
  4. https://data.oecd.org/emp/self-employment-rate.htm
  5. ttps://hbr.org/2014/02/where-are-all-the-self-employed-workers
  6. http://www.pewsocialtrends.org/2015/10/22/three-in-ten-u-s-jobs-are-held-by-the-self-employed-and-the-workers-they-hire/
  7. http://www.talenteconomy.io/2017/08/03/self-employed-workforce-comes-benefits-caveats/
  8. https://www.bls.gov/careeroutlook/2014/article/self-employment-what-to-know-to-be-your-own-boss.htm
  9. http://www.huffingtonpost.com/erica-gellerman/5-benefits-of-self-employ_1_b_8115936.html
  10. https://www.forbes.com/sites/eriksherman/2017/01/14/self-employed-ranks-are-far-smaller-and-less-well-off-than-many-want-to-pretend/#4877ec59563a
  11. https://www.dol.gov/general/topic/disability/selfemployment
  12. http://www.pewresearch.org/fact-tank/2016/09/01/8-facts-about-american-workers
  13. https://www.usda.gov/media/press-releases/2015/03/17/family-farms-are-focus-new-agriculture-census-data