The Best Sign That It's Safe to Start a Business Again

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Self-employment is suddenly spiking in 2012. That might sound like more people are giving up hope on the job market and going it alone. In fact, it's great news.

For the last four years, more Americans were starting their own businesses, yet self-employment was decreasing. This sounds like a contradiction, but it's not. The explanation -- and the surge of self-employed Americans in the last few months -- tells an important story about the recovery.

For three years, lots of businesses were being born, but even more were likely dying.Today, businesses appear to be surviving. And that's the best sign that it's safe to hang up your own shingle in the U.S. today.

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How can we know for sure? Just step this way.

During the recession and its aftermath, the share of Americans starting their own business each month -- whether small corner stores or high-tech start-ups -- reached a 14-year high, as shown in this graph below from the Kauffman Foundation. But despite that apparent flurry of entrepreneurial activity, the number of self-employed Americans went into free-fall. From mid-2007 to September 2011, the non-seasonally adjusted total dropped by more than 2 million.

In short, lots of people were starting companies, but like ghosts, they didn't seem to be showing up in employment figures. 

Kauffman_Index.PNG

There are a few reasons this could have happened. For instance, some new businesses being founded might have been side-gigs for people with day jobs -- say, a college professor moonlighting as a consultant. Those sorts of ambitious folks wouldn't show up as self-employed, since they had full time work with a larger company. There's at least one compelling piece of evidence for the side-gig theory: even as the number of people claiming to work for themselves dropped, the number of businesses without any employees other than the owner increased, according to the Census Bureau. That suggests a lot of people were making money from second businesses after hours, then telling the government's data collectors that they worked for another company full time. 

But chances are that's only a part of the explanation. Rather, it's likely that for every new business that was being created, many more were biting the dust as the economy took a plunge. And as more businesses went bust, the self-employment figures dropped. 

Because of the way the Census Bureau tracks the opening and closing of new companies -- basically, a lot of self-employed workers get left out of their numbers -- it's hard to confirm this theory for sure. However, Bureau of Labor Statistics data show that, from the recession through 2010, business establishments were closing faster than they were opening. An "establishment" is just a place where people work, meaning anything from a Popeye's franchise to a Boeing plant to a tiny, independently owned clothing boutique. That means the BLS numbers can't strictly tell us whether whole companies or small businesses were disappearing. But they do tell us there was a general decline in the number of shops, offices, and factories in this country, as shown in the graph below. 

The BLS numbers tell us that a net 324,000 establishments disappeared between 2008 and 2010. But that figure may understate the impact on smaller businesses, which are more vulnerable to recessions and slowdowns in bank lending than big corporations. In total, more than 4 million establishments shuttered for good during those three years. Chances are a lot of them were more mom and pop operations that were eventually replaced by large chains 

BLS_Establishment_Data_2007_2011.PNG

Establishments began their rebound around in the second half of 2011 (sadly, these numbers are only available through the end of last year), and not long after, the self-employed numbers started returning to health. The BLS doesn't report seasonally adjusted figures for all of its self-employment data, so I've only used the un-adjusted numbers for consistency's sake.On that basis, self employment dropped a bit in September, but is still up decisively over the past 12 months. 

BLS_Self_Employed_Total_Inc_UnInc.PNG

This could be a sign that many, many more people have suddenly decided to try their hand at running their own business, enough to offset all the entrepreneurs who are closing up shop. But that seems unlikely, given that the Kauffman foundation's entrepreneurship rate was already dropping in 2011. Chances are, it means that fewer businesses are being shuttered. More of the self-employed are managing to make to make a living at it. And that's a positive sign for the whole economy. 

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Jordan Weissmann is a senior associate editor at The Atlantic.

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