Drop in Self-Employment Shows Recovery Eludes Small Business

The number of Americans who were self-employed dropped in August to the lowest level in eight years, showing the economic recovery is not strong enough to nurture new businesses, reported Bloomberg.

There were 8.68 million people working for themselves last month, the fewest since January 2002, according to Labor Department data released today. That’s down 13 percent from a record 9.98 million reached in December 2006, 12 months before the latest recession began.

Self-employment tends to increase during and immediately following economic slumps as tight labor markets prompt recently fired workers to venture out on their own, said Scott Shane, a professor of economics at Case Western Reserve University in Cleveland. The data this time is testament to the lack of credit and a slump in demand that is choking small businesses, he said.

“The failure rate of self-employment picked up a lot during the recession,” Shane, who studies entrepreneurship, said. “I think the indications are not good at all.”

Private payrolls, excluding government agencies, rose by 67,000 in August after increasing by 107,000 the prior month, the Labor Department reported today. The jobless rate climbed to 9.6 percent from 9.5 percent in July, the first increase in four months, as 550,000 people joined the labor force seeking work.

“This is not a good environment for starting a business,” said Jonathan Basile, an economist at Credit Suisse in New York. “Look at the headwinds the household sector faces. These are headwinds that are going to be in place for some time.”

A broader measure of self-employment, which includes people whose businesses are incorporated, fell to 13.9 million in the second quarter, down 7.2 percent since the start of the recession and also the lowest in eight years, according to Labor Department data.

Only when larger companies begin hiring well after a recession ends does self-employment typically start to wane, Shane said, pointing out another anomaly this time around.

“When you see self-employment numbers go down and don’t see the other labor numbers go up, that’s not a very good sign,” said Credit Suisse’s Basile.

The self-employed, including both incorporated and unincorporated, account for 10 percent of total U.S. employment and perform jobs ranging from business consultants and store owners to construction workers and handymen. Construction and retail businesses fared particularly poorly during the recession, said Steven Hipple, an economist at the Bureau of Labor Statistics.

Businesses with no paid employees made up 79 percent private non-farm businesses in 2007, according to preliminary data from the Census Bureau released earlier this year. The barriers to starting a business remain high, Shane said, citing declines in venture capital funding and fewer so-called angel investors who take an interest in small businesses.

The Obama administration is urging Congress to pass a package of tax incentives and lending aid for small businesses. President Barack Obama today said there is “no quick fix” for the U.S. economy as it emerges from the recession and promised to lay out new ideas next week to boost growth and hiring.

Gene Fairbrother, lead business consultant for the National Association of the Self-Employed in Dallas, says fortunes may be about to turn.

Calls to the NASE’s business hotline are starting to change from questions about financing to queries about how to help a business thrive and increase sales, Fairbrother said. “That would be an indicator that for small businesses the economy seems to be stabilizing,” he said.

Adam Edelman, a Baltimore-based marketing adviser for small and medium-sized firms who’s been his own boss for eight years, said demand for his services has improved this year for the first time since the recession began.

“It was pretty nasty during the recession,” Edelman, 47, said. While business has improved this year “people are still very careful about how they spend their marketing and business- development dollars.”