In defense of the emerging freelance economy

As technology becomes cheaper and more powerful, an entrepreneur can have a very profitable business without having any employees. This has always been true for many professionals, but now it applies to many more people. For example, many lawyers had to rely upon secretaries in the past. Yet now you can learn how to use a powerful word processing program and there’s no need for staff. With today’s tough economic conditions, it’s likely this trend is accelerating, as many people are finding ways to pay the bills by offering up their services on an independent contractor basis in lieu of finding a new job.

As pointed out in Forbes, this new trend is making it more difficult to get accurate employment statistics.

Steinberg works 30 to 40 hours a week. But along with millions of other contractors, she may not show up on the radar of the U.S. Bureau of Labor Statistics, which compiles unemployment statistics by surveying households and counting pay stubs. No one knows how many freelancers, part-timers and consultants there are–the Government Accountability Office took a stab in 2006, guesstimating that the group made up 30% of all workers–much less how many escape the notice of the BLS. “It’s difficult to track, and is often misclassified or not accounted for by the Department of Labor,” says Sarah Horowitz, director of the Freelancers Union in Brooklyn, N.Y. One thing is certain: The shape of the so-called informal economy is changing.

For some, this obviously involves unreported income, yet I suspect that’s not true for most of the new entrepreneurs. Many of them want to work at home, do something they love or want the freedom of being their own boss. In many cases they are selling goods and services that aren’t purchased on a cash basis, so hiding income really isn’t an option. Also, many people want to have a legitimate business that they can grow, and worrying about hiding income from the IRS is not part of the plan.

Some like Scott Shane are concerned by this trend.

Myth: The total number of businesses created is what matters, not the types of businesses that are being created.

Reality: I’ve noticed a disturbing trend in what entrepreneurship in America is becoming. Over the past decade, we have been creating more non-employer businesses and fewer employer businesses per capita. (Employer businesses are companies that the Census Bureau reports have at least one employee; non-employer businesses have no employees.) As a result, the employer business share of the total businesses has slipped four percentage points since 1997, from 26.4% of the total in 1997 to 22.4% in 2007 (see figure to the right). Moreover, there is nothing in the data to suggest that this trend is going to reverse itself anytime soon.

Why am I concerned about this trend? Non-employer businesses aren’t the source of job or wealth creation that employer businesses are, which means the U.S. economy doesn’t benefit as much from them. By definition, non-employer businesses don’t create any jobs, and their sales and profits are quite low. So low, in fact, that the Census Bureau’s 2002 Survey of Business Owners indicated that only 44% of non-employer businesses were the primary source of income for their owners.

To boot, non-employer businesses’ are becoming less substantial over time. According to Census data, the average revenues at these firms have declined about 12% in real terms since 2000, when they were less than $50,000 per year to begin with.

Of course you’d rather have businesses that hire plenty of employees, but that doesn’t mean one-person operations don’t have a net positive effect on the economy. First, it provides a lucrative and appealing option for many people. It offers them a lifestyle that they might not be able to achieve working for a company, and it allows many to do something they love as well. That’s a good thing. Also, these small business offer services that other companies value. In many instances they can offer better services for a better price as they don’t have overhead and can be very efficient with today’s technology. Again, more efficiency helps the overall economy and lowers prices for everyone.

Small operations also unleash creativity, as people working for themselves are very motivated and aren’t constrained by the bureaucracy of a larger organization. Imagine where the Internet would be today without these types of entrepreneurs.

Finally, some of these one-person operations will grow and perhaps lead to larger companies with employees, or at least relationships with other service providers.

We should focus on measuring this trend better, but in many ways this can be a net plus for the growth of a modern, dynamic economy.


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