Who are the self-employed?

Kogut, Carl A. ; Short, Larry E.

ABSTRACT

The purpose of this paper is to describe the self-employed in the United States (as identified by the 2000 U. S Census) and show how they differ from employees who are not self-employed. The findings suggest that the self-employed are generally older, more likely to be male, and in more lasting marital relationships than employees in governments and private companies. The self-employed are predominately White and generally make more money than those workers who are not self-employed.

INTRODUCTION

During most of the 20th Century, the United States has utilized neoclassical economic theory to guide the economic development efforts of the nation. One of the central concepts of neoclassical economic theory is economies of scale, which assumes that as the size of the firm increases, the per-unit cost of the product decreases. America's adoption of neoclassical economic theory and the domination of large firms have led many Americans to believe that large firms are the key source of creation and distribution of wealth. Two influential books supported the importance that large businesses play in economic development. William Whyte's (1956) book, The Organization Man, suggested that the Great Depression and military training in World War II created a society willing to accept employment in, and obedience to, large bureaucracies. John Kenneth Galbraith (1967) in his book The New Industrial State, suggested that those large corporations, working in coordination with governments and labor unions, would run nations in the future. Neoclassical economic theory, which has been the mainstream economic theory in the United States for a century, supported the concept that big business is a very important part of economic development.

Other economists have argued that the entrepreneur is an integral part of the economic development process. Schumpeter (1934) saw innovation as the key for creating new demand for goods and services and entrepreneurs, as owner-managers, were the driving forces who start businesses to exploit innovation. Schumpeter's supposition that entrepreneurship made a significant contribution to economic development has been supported by numerous studies. In a study of U. S. firms during the period from 1969 through 1976, Birch (1987) discovered that small firms (firms with 100 or fewer employees) created 81 percent of the net new jobs in the United States. Birch also reported that an analysis of the U. S. Small Business Administration data base from 1969 through 1990 indicates those firms with 100 or fewer employees are the primary job creators in the United States. Entrepreneurs in the United States start between 3.5 million and 4.5 million businesses each year. (NFIB, 2000, p. 15) And the small business economic sector in the United States is the world's largest economy, trailing only the overall economy of the United States and the economy of Japan. (NFIB, 2000, p. 33) It is becoming increasingly evident that small firms, in the current environment of rapid change and high technology, are a driving force in the U. S. economy. Scarborough and Zimmer (2003, pp. 2-3) suggest that whereas twenty-five years ago competitive advantages favored large companies, today the balance has tipped in favor of small, entrepreneurial companies. The entrepreneurial economy is growing. The U. S. Government reports that almost 10% of the people in the 2000 Census classified themselves as self-employed.

We know a lot about why people go into business for themselves. Research has shown that the six most frequently given reasons for becoming self-employed are for the opportunity (1) to gain control over their own destiny, (2) to make a difference, (3) to reach their full potential, (4) to reap unlimited profits, (5) to contribute to society, and (6) to do what they enjoy doing. (Scarborough & Zimmer, 2003, pp. 9-11) Although we may know a lot about why people give up the security of regular employment for self-employment, we do not know much about whom these people are and how they differ from those who are not self-employed. Who are these people who give up the security of employment with private firms or government agencies to open their own businesses and assume the risks of failure for the possibility of future profits?

PURPOSE OF STUDY

The purpose of this study is to describe the self-employed in the United States (as identified by the 2000 U. S Census) and show how the self-employed differ from those who are employed by local, state and federal governments and by private for-profit and not-for-profit companies.

SAMPLE

The 2000 U.S. Census 5% Public Use Microdata Sample was used as the data source for this study. Analysis was restricted to individuals who listed themselves as either self-employed in incorporated or unincorporated businesses, employed in local, state, or federal governments, or employed in private for-profit or private not-for-profit companies. Persons less than 16 years of age, persons who were unemployed with no work experience in the last five years, and persons who listed themselves as unpaid family workers were excluded from the study.

In attempting to describe the self-employed and show how they differ from those who are employed by private companies or by governments, a comprehensive list of demographic characteristics would be useful. We are, however, limited to describing individuals by the demographic characteristics identified by the U. S. Census. For example, although it may be fruitful to ascertain if religion or political preference plays a role in a person's selection of employment, the U. S. Census does not provide this information in the 5% Public Use Microdata Sample. So, when using the U. S. Census as the data base, we must be content with describing individuals by the demographic characteristics provided by the government. For the purposes of this study, we have chosen the following demographic characteristic from the U. S. Census; sex, age, race, marital status, education, citizenship, place of birth, English ability, and total earnings.

For the purpose of identifying a person's race, minority group members have been classified into five categories:

African American A person having origins in any of the black
(except Hispanic).. racial groups of Africa

American Indian or A person having origins in any of the original
Alaskan Native peoples of North America and who maintain their
(Native). culture through a tribe or community.

Asian or Pacific A person having origins in any of the original
Islander (Asian). people of the Far East Southeast Asia, India,
 or Pacific Islands.

Hispanic. A person of Mexican Puerto Rican Cuban, Central
 or South American or other Spanish culture or
 origin, regardless of race.

Other Minority.. A person who entered two or more major race
 groups or wrote in an entry such as multiracial
 or mixed in the census report

With the exception of the Other Minority category, this classification system follows the EEOC guidelines that specify that the term minority is used to mean four particular groups who share a race, color or national origin. (EEOC, 2003)

The 2000 U.S. Census 5% Public Use Microdata Sample of employed persons consisted of 8,259,041 people of which almost 10% were self-employed. The sample consisted of 52% males, of which 58% were currently married; 87% were born in the USA, and 93% were US citizens. Racial distribution of the sample was 73% White. Less than 4% of the sample rated their English ability as not well or not at all.

The sample was well distributed across age groups with 38% of the sample less than 35 years of age, 45% were between 35 and 54 years of age, and 17% were 55 years or older. Almost one-half of the sample (46%) had a high school education or less; 31% had some college but no bachelor's degree, and 23% had a bachelor's degree or better. More than 85% of the sample earned less than $50,000 annually. Of the remaining 15% of the sample, 9% earned from $50,000 to $74,999 annually, and only 6% earned $75,000 or more. Remember that this sample does not reflect the overall population of the United States, but is a fairly accurate reflection of those who are employed.

FINDINGS

Impact of Gender and Marital Status.

As can be seen in Table 1, the self-employed are quite different in terms of gender and marital status than employees of governments and private companies. A much larger percent of the self-employed are male and married than those who are not self-employed. More than 65% of the self-employed are male, whereas only about 50% of employees of governments and private companies are male. Almost 72% of the self-employed are currently married, whereas only about 56% of employees of governments and private companies are currently married.

Impact of Foreign Birth.

Table 2 shows the percent distribution of self-employed and employees who are not self-employed by place of birth, citizenship, and English-speaking ability. As can be seen in Table 2, none of these demographic characteristics had much of an impact on a persons choice of career. Approximately 87% of both the self-employed and the employees of governments and private companies were born in the USA; 94% of the self-employed and nearly 93% of the employees of governments and private companies were citizens of the USA; and about 3% of the self-employed and almost 4% of the employees of governments and private companies considered their English-speaking ability as "not well" or "not at all."

Minority Status

As can be seen in Table 3, meaningful differences can be seen between the self-employed and employees who are not self-employed with respect to minority group representation. A much smaller percentage of African Americans and Hispanics are self-employed than are employed by governments and private companies. The percentage distribution of Asians, Natives, and Others appear to be similarly divided between being self-employment and employment by others. Non-minority persons dominate the self-employed with almost 83% of the self-employed being White while only about 72% of those working for governments and private companies are White.

Age and Education

Table 4 shows the percentage distribution of self-employed and employees who are not self-employed by age and education. Age appears to be a big factor in whether some persons choose self-employment. Governments and private companies appear to have a larger percentage of their workforce as young employees as compared to the self-employed. Only about 18% of the self-employed are less than 35 years of age while nearly 40% of employees of governments and private companies are less than 35 years of age. Middle-aged persons (i.e., employees aged 35 through 54) represent a little over 52% of the self employed but only about 44% of those not self-employed. A meaningful difference between the self-employed and those not self-employed can be discerned in the age group of employees aged 55 and older. Whereas almost 30% of the self-employed are 55 years and older, only about 16% of those employed by governments and private companies are in this age group. Interestingly, education does not appear to be a meaningful factor in self-employment. In almost every educational group, 2.5 percentage points or less separate the distribution between the self-employed and those who are not self-employed. Only in the highest educational level (i.e., Professional/PhD) does education have a meaningfully larger percentage of self-employed persons (i.e., about 7%) than those not self-employed (just over 2%).

Annual Earnings

As can be seen in Table 5, self-employment has an impact on total annual earnings of individuals. Whereas almost 86% of those employees working for governments and private companies earn less than $50,000 annually, only 78% of the self-employed earn less than $50,000 annually. The distribution of total annual earnings in the $50,000 to $74,999 categories is about 9% for both the self-employed and those who are not self-employed. The biggest difference between the two groups comes in the total annual earnings categories of $75,000 annually or over. In every category of $75,000 or over, the percentage of self-employed exceeds the percentage of those who are not self-employed. Overall, almost 13% of the self-employed earn $75,000 or more in comparison with only about 5% of employees of governments and private companies.

CONCLUSIONS

It appears that the self-employed are similar to employees of governments and private companies in some ways and quite different in others. The self-employed are more likely to be male and currently married. This fact belies current arguments that self-employment is extremely tough on family relationships. On the other hand, it may be that having a working spouse allows the freedom to take the risks involved in entrepreneurial activities. Foreign birth appeared to have no meaningful impact on a person's choice of employment. Although it is popular to assume that entrepreneurship is a haven for immigrants hindered with poor English-speaking ability, this has proven to be untrue. No meaningful differences could be found between the self-employed and employees who were not self-employed when analyzed by place of birth, USA citizenship, or English-speaking ability.

Minorities continued to be a "minority group" among the self-employed with only 17% of the self-employed being minority persons, whereas minorities make up 27% of the non self-employed workers. Age is also a dominant factor in self-employment with almost 30% of the self-employed being over the age of 55 in contrast to only 16% of those not self-employed. Education, however, does not appear to be a meaningful factor in being self-employed except in the highest education level, i.e., Professional/PhD. This can be easily explained by the requirement for advanced degrees in many of the professions, such as law and medicine, that select self-employment as their primary choice of business organization. Considering the fact that almost 78% of the self-employed earn less than $50,000 annually while more than 85% of the non-self-employed workers earn less than $50,000 and almost 13% of the self-employed earn $75,000 or over and only about 5% of those who are not self-employed earned $75,000 or over, it appears that more opportunities exist for earning a higher income if one is self-employed.

In summary, the self-employed appear to be older, more male and in more lasting marital relationships than their counterparts in governments and business. Place of birth, citizenship, and ability to speak English do not differentiate the self-employed from other workers, although minority status does. The self-employed appear to be mostly White. Education only impacts the choice of self-employment versus working for others at the professional and PhD level. And lastly, the self-employed appear to have higher annual earnings than those who work for governments and private companies.

REFERENCES

Birch, D. (1987). Job Creation in America. New York: The Free Press.

Galbraith, J. K. (1967). The New Industrial State. Boston, MA: Houghton, Mifflin.

NFIB (2000). NFIB Small Business Policy Guide. Washington, DC: NFIB Education Foundation.

Scarborough, N. M. and T. W. Zimmer (2003). Effective Small Business Management: An Entrepreneurial Approach. 7th ed. Upper Saddle River, NJ: Prentice Hall.

Schumpeter, J. A. (1934). The Theory of Economic Development. Cambridge, MA: Harvard University Press.

U. S. Census Bureau, http://www.census.gov/Press-Release/www/2003PUMS5.html .

U.S. Equal Employment Opportunity Commission. 2003. Annual Report on the Federal Work Force, Fiscal Year 2002. Available at http://www.eeoc.gov/federal/fsp2002/index.html. Accessed February 2, 2004.

Whyte, W. H. (1956). The Organization Man. New York: Simon and Schuster.

Carl A. Kogut, University of Louisiana at Monroe Larry E. Short, University of Louisiana at Monroe

Table 1: Percent Distribution of Self-Employed Persons and Employees
Who Are Not Self-Employed by Gender and Marital Status, 2000

Gender Self-Employed Employees Not Self-Employed *

 Male 65.3% 50.4%
 Female 34.7 49.6
Martial Status
 Married 71.9% 56.3%
 Not Married 28.1 43.7

* Consists of employees of local, state, and federal governments
and employees of private for-profit and not-for-profit companies.

Source: 2000 U.S. Census 5% Public Use Microdata Sample

Table 2: Percent Distribution of Self-Employed Persons and Employees
Who Are Not Self-Employed by Place of Birth, USA Citizenship,
and English Speaking Ability, 2000

 Self-Employed Employees Not
 Self-Employed *
Place of Birth
 Born in USA 87.0% 86.6%
 Not Born in USA 13.0 13.4
Citizenship
 Citizen of USA 94.1% 92.8%
 Not Citizen of USA 5.9 7.2
English Speaking Ability
 English Only 84.9% 83.1%
 Very Well 8.0 9.4
 Well 3.8 3.6
 Not Well 2.5 2.7
 Not at All 0.8 1.2

* Consists of employees of local, state, and federal governments
and employees of private for-profit and not-for-profit companies.

Source: 2000 U.S. Census 5% Public Use Microdata Sample

Table 3: Percent Distribution of Self-Employed Persons and Employees
Who Are Not Self-Employed by Minority Status, 2000

 Self-Employed Employees Not Self-Employed *

African American 4.6% 10.6%
Asian 3.4 3.5
Hispanic 7.3 11.1
Natives 0.6 0.8
Others 1.4 1.6
White 82.7 72.3

* Consists of employees of local, state, and federal governments
and employees of private for-profit and not-for-profit companies.

Source: 2000 U.S. Census 5% Public Use Microdata Sample

Table 4: Percent Distribution of Self-Employed Persons and Employee
Who Are Not Self-Employed by Age and Education, 2000

 Self-Employed Employees Not Self-
 Employed *
Age
 16-24 4.2% 17.8%
 25-34 13.7% 22.1%
 35-44 26.1% 24.4
 45-54 26.0 19.8
 55-64 17.5 10.9
 65 + 12.5% 5.0
Education
 No High School 16.0% 18.1%
 High School 27.7 28.3
 Some College 28.3 30.8
 Bachelors Degree 16.1 15.0
 Masters Degree 5.1 5.6
 Professional/PhD 6.9 2.3

* Consists of employees of local, state, and federal governments
and employees of private for-profit and not-for-profit companies.

Source: 2000 U.S. Census 5% Public Use Microdata Sample

Table 5: Percent Distribution of Self-Employed, Government Employed,
and Privately Employed Persons by Total Annual Earnings, 2000

 Self-Employed Employees Not Self-Employed *

Under $25,000 57.1% 57.5%
$25,000 - $49,999 20.9 28.3
$50,000 - $74,999 9.2 9.0
$75,000 - $99,999 4.1 2.7
$100,000 - $149,999 3.7 1.5
$150,000 - $199,00 0.8 0.3
$200,000 and over 4.3 0.7

* Consists of employees of local, state, and federal governments and
employees of private for-profit and not-for-profit companies.

Source: 2000 U.S. Census 5% Public Use Microdata Sample