Self-Employment Climbs, But Earnings Fall

The one bright spot in rural America’s small-business development in the last decade was in “nonemployer” businesses, what we typically know as self-employed workers. The bad news is that earnings in this category dropped dramatically over the last decade.

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Percent Change Nonemployers, Micro, and Small Businesses, 2002-2012

When small cities and rural communities talk about adding jobs, the conversation frequently turns to recruiting outside employers to set up shop locally and put people to work. But Census data from the last decade shows that one of the bright spots in nonmetro economic development since 2002 has been among self-employed workers – the ones who create their own jobs locally.

In fact, such businesses were the only ones among businesses that employ 20 or fewer employees that expanded from 2002 to 2012, according to Census data analysis.

This finding ought to be part of rural economic development discussions, especially when it comes time to determine how to invest limited resources in efforts to create local jobs.

“Nonemployer” vs. Micro and Small Businesses           

To better understand the role of small businesses in creating work opportunities, the U.S. Census Nonemployer Statistics dataset was analyzed. “Nonemployer” is what the Census calls businesses that have no paid employees. These are typically very small, unincorporated entities. In common language, we usually refer to these business owners as self-employed. According to the Census definition, such businesses pay at least some federal taxes and have annual receipts of $1,000 or more. (In the construction industry, the Census includes all businesses that have $1 or more in receipts).

The Census County Business Patterns dataset for continental U.S. counties was also analyzed. This dataset includes businesses with paid employees. Besides nonemployer businesses (remember, that’s what we usually call self employed), two other types of entities were included: “micro” business (MB), which have one to four employees, and “small” businesses (SB), which have five to 19 employees.

The growth or decline in these types of businesses from 2002 to 2012 in rural (noncore) counties, counties with small cities (micro), and metropolitan areas were analyzed. Some of the results are in the chart at the top of this article.

A similar pattern can be seen in micro businesses (MB) and small businesses (SB): Both increased in metropolitan counties and decreased in small city and rural counties.

Nonemployers or self-employed, however, increased in all county types. The number of nonemployer businesses increased from 17.5 million in 2002 to 22.5 million in 2012 in the nation; in rural counties, this number went from 1.1 million in 2002 to 1.2 million in 2012.

In fact, the share of nonemployers of all business establishments (including those with paid employees) also increased between 2002 and 2012 across all county types. In 2012 three-quarters or 75.4% of all business establishments in the U.S. were nonemployers. This proportion also holds for metropolitan and rural counties, and is slightly lower for small city counties. On the other hand, the share of micro and small businesses decreased during this same time period (not shown).

When adding up nonemployers, micro, and small businesses, they account for a whopping 96.6% of all businesses in 2012, up from 96% in 2002. In other words, less than 4% of total businesses had 20 or more employees in 2012. Note that this share was slightly higher in rural counties in both years.

 

Percent of Nonemployer, Micro, and Small Businesses of All Businesses, 2002-2012

US Census Nonemployer Statistics Dataset; US Census County Business Patterns

 

The maps below show the geographic distribution of nonemployer establishments per 100 residents. Note a high concentration in Colorado and central Texas. During a 10-year period, no major changes were observed. It can be seen though that those areas where poverty is higher, the nonemployer businesses per 100 residents is lower. 

What about number of jobs? The table below shows the number of wage & salary (WSE) jobs over the same time period. These increased 2.2% nationlly,from 135 million in 2002 to 138 million in 2012. But the number of wage-and-salary jobs in both small city and rural counties decreased by about 1% during the period, from 17.3 million to 17 million.

While the number of nonemployer businesses increased during this period, the news wasn’t as good when it came to what these businesses earned. Average nonemployer income adjusted for inflation (2013 dollars) decreased between 2002 and 2012 across all county types. Average nonemployer income fell almost $12,000 dollars in metropolitan counties compared to $3,500 in rural counties. However, it was in metropolitan counties where an explosion in nonemployer businesses took place during the same time period (almost one-third increase).

 

Average Nonemployer Business Income, 2002-2012

Source: US Census Nonemployer Statistics Dataset

This analysis shows us three things.

First, nonemployers have been resilient compared to businesses with less than 20 paid employees. Out of necessity or simply to expand household income, regulatory and finance issues remain as a top concern for entrepreneurs and small businesses.

Second, “traditional” economic development strategies like recruitment must be reconsidered and focus more on retention and expansion of existing businesses. Scarce resources should be channeled to supporting these nonemployers, micro, and small businesses.

Third, it must be noted that even though an increase in number of nonemployers occurred, income did not keep up. Efforts to help these businesses increase their income should be an economic development priority.

Access to broadband and effective use of broadband applications can help in that this technology levels the playing field between metropolitan and rural businesses giving not only access to vast markets worldwide but can also help entrepreneurs and small businesses save money and increase productivity. A study by the Internet Innovation Alliance found that start-ups can save up to $16,000 dollars in their first year by using broadband applications.

Imagine this: Half of the nonemployers (self-employed) in rural areas in 2012, or about 500,000, increase productivity and revenues within two to three years and end up hiring one employee. This immediately translates into 500,000 new jobs, sufficient to reverse the wage & salary jobs decline in rural areas between 2002 and 2012.

Roberto Gallardo is an associate Extension professor at Mississippi State University.

 

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