Job Loss in the Recession: If You Work for Yourself, Are You Worse Off?

Scott Shane

Lately, there has been a lot of discussion of job losses. Most of that discussion has focused on people who work for others because it's easier for people to grasp the meaning of job losses in terms of company layoffs than in terms of decisions by self-employed people to shutter their operations.

Perhaps because loss of jobs by the wage employed is easier to explain, the media have been pretty silent about how bad recession-induced job loss has been on the self-employed. So, I decided to take a look at this question.

Below is a chart that I created from data downloaded from the Bureau of Labor Statistics website. It measures the change in the (seasonally adjusted) number of self-employed and nonagricultural private-sector wage-employed people between December 2007 and July 2008 and between July 2008 and December 2008. I set the baseline to 100 percent in December 2007 for both groups so that the different job-loss patterns for the wage- and self-employed are clear.

The Number of People Employed in the Category as a Share of the Number Employed in the Category in December 2007.

Source: Bureau of Labor Statistics website http://www.bls.gov/webapps/legacy/cpsatab5.htm

The data indicate that the rate of job loss has been higher for self-employed people than for wage-employed people in the private sector. In December 2008, the number of self-employed was 96.2 percent of what it was a year earlier, while the number of private-sector wage employed was 97.2 percent of its level in December 2007.

But that's not the most interesting thing that the data show. The most interesting thing is the shape of the decline. For the private-sector wage employed, there has been consistent job loss for the past year (although the pace of the decline accelerated in the second half of the year). Of course, if you haven't been living in a cave for the past six months, there is nothing new there.

Now, look at what happened to the number of self-employed. In the first half of 2008, the number increased, just as many economists argue tends to happen during a recession. (Layoffs reduce the opportunity cost of self-employment—the portion of people earning a salary goes down—pushing up the number of people willing to be self-employed.)

In the second half of the year, however, the normal pattern didn't happen. In fact, from August to October, self-employment fell off a cliff. As you no doubt remember, these months marked the start of the credit crisis.

What does this mean? I think that the normal upward pressure on self-employment that occurs in a recession was swamped by other factors, which either drove a lot of self-employed people out of business or made those who were not yet self-employed afraid to go into business for themselves.

Scott Shane is A. Malachi Mixon III, professor of entrepreneurial studies at Case Western Reserve University. He is the author of The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By, among other books.

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