Last year was a fabulous one for entrepreneurs, at least according to the Kauffman Index of Entrepreneurial Activity released last month by the Ewing Marion Kauffman Foundation. "Rather than making history for its deep recession and record unemployment," the foundation reported, "2009 might instead be remembered as the year business startups reached their highest level in 14 years -- even exceeding the number of startups during the peak 1999-2000 technology boom."
Another surprise is the age of these new entrepreneurs. According to the report, most of the growth in startups was propelled by 35- to 44-year-olds, followed by people 55 to 64. Forget Internet whiz kids in their 20's. It's the gray-heads who are taking the reins of the new startup economy.
And if you thought minorities had been hit particularly hard by this awful recession, think again. According to the report, entrepreneurship increased more among African-Americans than among whites.
At first glance, all this seems a bit odd. Usually new businesses take off in good times when consumers are flush and banks are eager to lend. So why all this entrepreneurship last year?
In a word, unemployment. Booted off company payrolls, millions of Americans have had no choice but to try selling themselves. Another term for "entrepreneur" is "self-employed."
According to an analysis of Bureau of Labor Statistics data, the number of self-employed Americans rose to 8.9 million last December, up from 8.7 million a year earlier. Self-employment among those 55 to 64 rose to nearly two million, 5 percent higher than in 2008. Among people over 65, the ranks of the self-employed swelled 29 percent. Many older people who had expected to retire discovered their 401(k)'s had shrunk and their homes were worthless. So they became "entrepreneurs," too.
Maybe this is a good thing. A deep recession can be the mother of invention. These Americans are now liberated from the bureaucratic straitjackets they thought they had to wear. They can now fulfill their creative dreams and find their inner entrepreneurs. All they needed was a good kick in the pants.
But this upbeat interpretation doesn't include lots of people who don't particularly relish becoming their own employers, like an acquaintance whom I'll call George. George was an associate partner at one of the world's largest technology and consulting firms until he lost his job last year in a wave of layoffs. For months, George knocked on doors but got nowhere because of the deep recession.
Finally, his old firm got some new projects that required George's skills. But it didn't hire George back. Instead, it brought him back through a "contingent workforce company," essentially a temp agency, that's now contracting with George to do the work. In return, the agency is taking a chunk of George's hourly rate.
Technically, George is now his own boss. But he's doing exactly what he did before for less money, and he gets no benefits -- no health care, no 401(k) match, no sick leave, no paid vacation. Worse still, his income and hours are unpredictable even though his monthly bills still arrive with frightening regularity.
The nation's official rate of unemployment does not include George, nor anyone in this new wave of involuntary entrepreneurship.
Friday's job numbers are likely to show substantial gains but they'll still be small relative to the army of America's unemployed and underemployed -- and the growing number of anxiously self-employed.
Yet to think of the latter group as the innovative owners of startup businesses misses one of the most significant changes to have occurred in the American work force in many decades.
Typically each year, large numbers of Americans leave their old jobs to find new ones. Unemployment rises during recessions mainly because companies hire fewer workers, not because they lay more people off. But this Great Recession has been different. Layoffs by mid-sized and large companies have surged while hiring has almost disappeared.
These companies have used the sharp downturn as an opportunity to cull their payrolls for good -- substituting labor-saving technologies and outsourcing to workers abroad or to contract workers here. This explains why almost half of America's unemployed have been jobless for more than six months -- a greater proportion than at any time since the Great Depression. It also explains why so many people like George have joined the ranks of the self-employed.
Yes, a growing number of Americans went out on their own before the recession, but clearly their numbers have vastly increased. While some are happy about their new status, most are worse off than they were before. It's one thing to be a contingent worker in good times and when you're young; quite another in bad times when you're middle-aged.
Still, many would rather view these people as entrepreneurs and owners of startup businesses, and see their major challenge as getting adequate credit. Congress's Joint Economic Committee reported last week that small businesses continue to face tight lending standards. "Small business is the job-creation engine that powers this economy," said Representative Caroline Maloney, the New York Democrat who heads the committee. Democrats will be pushing bills to make loans more available to them.
Indeed, America's startup businesses do need better access to credit. But many entities that look like small new businesses are actually self-employed people who need more than bank loans. They need predictable income and benefits.
For starters, they could use what might be called "earnings insurance" that would pay for up to two years part of the difference between what they earned on the old job and what they earn now on their own. Employed workers would contribute to the insurance fund through their payroll taxes, as they do with unemployment insurance, but the total bill for benefits would be unlikely to rise because earnings insurance would get them back to work quicker and thereby reduce the number of weeks they relied on unemployment benefits.
The self-employed also need more help saving. Since they can no longer depend on tax-free corporate matches to their 401(k)'s or I.R.A.'s, they should be entitled to tax credits that match them. Fortunately, thanks to the reform package passed by Congress, they will have more help getting affordable health care, as they will be able to use their aggregate bargaining power in medical exchanges to push down insurance costs.
New businesses are vital to job growth, and entrepreneurship does fuel the economy. And surely some of America's new independent workers will build their own companies. But when the economy is still so hard on so many, it's important to distinguish between entrepreneurial zeal and self-employed desperation.
This post originally appeared at RobertReich.org.
Reich is correct in his view that the new wave of entrepreneurship is partially an act of desparation. I lost count of the number of flyers placed on my door at home this year for yard cutting, Avon, church invites, party rentals with the inflatable bouncy things, etc. A former business client of mine went from building half-million dollar McMansions to driving a truck. Many former Realtors(TM) and mortgage brokers are not getting hired by any businesses for any position. It seems to be they have the same stigma as investment bankers. Many of the jobs around here that are normally staffed by teenagers or folks in their early twenties are now staffed by older people. When and if I ever have the opportunity to hire another person, I'll hire an older person, too.
When somebody gets a job these days, it's a celebration. The news spreads like wildfire as if it were like having a new child delivered into the world.
Is it like this where your are?
Our currency will collapse under its own weight, wiping out even the employed, investors and the well off. But there won’t be a bailout or cure, only then we’ll discover why they didn’t let us audit the FED or inventory the gold in Fort Knox. Only the Bankers, Uber-weathly, Multi-national Corporations, the Military and Political lapdogs living behind guarded walls with off shore weaklth will have a life worthy of living. The United States with all of its diversity and uneducated gun toten masses will become Balkanized. There will be War, only this time we will be the Cong.
It's almost criminal how many government obstacles and disincentives exist for small business owners.
I should know. I started a new business last fall, and dealing with licenses and government bureaucracy is one of the biggest problems we face.
The way the deck is stacked against employers isn't fair at all. If you want to be able to fire an incompetent person, you pretty much have to start building a file on every new hire as soon as they start, just in case it doesn't work out. Business owners shouldn't be forced to do this.
Living through this right now.
Extremely scary not knowing where the next dollar is going to come from.
Now that the blue collar workers have been squashed by big business, our economy is crumbling upwards. After the white collar workers are left with nothing, who do the CEOs and government think will be left to run the country and buy goods and services?
For reasons I won't bother repeating, this will not happen. As Paul Krugman has explained at length, the USA is not Greece. The largest burden this country bears as a greedy plutocracy that benefits from endless war, the crushing of the poor and the increasingly brutal assault on the middle class, which the plutocrats hate with undying passion.
We won't own anything, or really make good wages, or dictate our own hours, or do anything that entrepreneurs used to do before conservatives launched this strategy.
But we'll totally be self-employed.
...hell, why do we even count unemployed people anyway? Unemployed people are just entrepreneurs who are between contracts, and therefore the US has a 0% unemployment rate.
Prof. Reich is correct. All of America is the Rustbelt now. Reaganites and neo-cons were successful in using racist, fear-mongering to get working and middle class persons to vote against their own economic interests. This is still the plan which is why the Tea Party is a corporate sponsored organization. Rupert Murdoch and Fox News are the driving capital forces behind the movement. Preying on Americans sense of insecurity to divide and conquer is an ever present strategy, not just in capitalist countries, but communist countries as well. It helps the power elite do whatever they want while the people fight amongst themselves without identifying the true causes of their suffering.
How long will gullible Americans accept this status quo of false entrepreneurship? The government crushed small business decades ago and now people are noticing?!? It was not a left, liberal government that put this infrastructure in place, but a right leaning, fear-based Bush regime that buried us.
Most so-called "small businesses" are contractors.
Their jobs were created by their corporations who lay off employees, hire contractors.
Usually it's the same people: employee becomes small business.
This has been true in high tech for decades.
MS had 10,000 full-time contractors until the Feds ruled that those people were really employees, and MS had to pay benefits, e.g. matching SS payroll taxes.
The convention became, if you were a contractor for over a year, you're an employee.
So now in high tech, all contracts are ended before they last a year. The contractor can go away for three months, then come back for another contract.
That's the future, get used to it.
BTW: GREAT ARTICLE. This area has not been given much exposure.
Spending what is left of your life savings to start a business in the worst business climates since the Great Depression is nothing but foolhardy. In the best of times and economies only one in ten startup companies even survive. Those savings and that energy would be better spent demonstrating for reform in economic policy that would protect American manufacturing and buoy unions to claw back some of the gargantuan profits of the Wall Street multinational elite.
This is not a time to timidly survive and resell your expertise at a cut in pay. This is a time to vote the conscience of your own needs. In that vote is consensus with the needs of your fellow Americans and the survival of the economy on which you depend and on which the multinationals would prey.
starting a business now is the best time to do so. if you are successful you beat out all those that wait to start until the economy improves. if you can make a go of it now you will likely do even better once the economy improves and be able to weather the next downturn because you have already experienced a tough business climate.
i believe it is foolhardy to start a business at the peak of an economic cycle. at the peak you need to do what you have been doing all along and save as much as you can in preparation for the next downturn. and yes, there will always be a next downturn.