The Great Recession wasn’t a good experience for anyone (except perhaps bankruptcy attorneys), but most of the media attention was focused on what happened to employees of large companies. That’s understandable given the ease of looking at what happened to the employees of large companies. But it raises an important question: Was the experience of those in business for themselves worse, the same, or better than that of people who work for others?
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Several sources of data suggest that the recession had particularly adverse consequences for those who run their own businesses. Figures from the Bureau of Labor Statistics (BLS), which tracks U.S. employment, show that in the non-agricultural part of the private sector, job loss was higher among the self-employed than those who work for others. Between the fourth quarter of 2007 and the third quarter of 2010, the number of people working for someone else fell by 4.4 percent; whereas the number of self-employed people fell 6.3 percent.
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Another lesser effect of the recession can be seen in recently released individual income tax statistics for 2008. Internal Revenue Service (IRS) data shows that while 1.3 percent fewer tax returns showed wage and salary income in 2008 than in 2007, the amount of American’s wage and salary income of actually increased by 1.5 percent from 2007 to 2008. In contrast, the number of tax filers who paid self-employment tax fell 2.1 percent and the amount of the tax paid declined 1.8 percent. Similarly, business and professional income fell by 5.4 percent between the two years, and the income of partnerships and subchapter S corporations declined 12.5 percent. Thus, the data shows that small business owners’ incomes took a bigger hit in the (initial part of the) recession than workers’ earnings.
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What effect did this large cut in small business owners’ income have on their personal financial situation? That’s tough to know with any certainty, but we do have some indications that the cut in small business owners’ income led to a decline in their retirement savings and health insurance spending. On the health insurance side of things, the tax authority’s numbers show that the number of tax filers taking the self-employment health insurance tax deduction fell 5.8 percent between 2007 and 2008. (The amount of the deduction only fell 0.5 percent, but that may be because of the increase in the cost of health insurance.)
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Even larger declines can be seen in the contribution to retirement plans. The IRS data shows that between 2007 and 2008, the dollar amount of contributions to self-employment Keogh plans fell 8.2 percent. The number of returns indicating a contribution to these plans fell an even higher 15.0 percent. (It is important to note, however, that while large, these drops are of similar magnitude to the decline in contributions to individual retirement arrangements, which fell 17.4 percent in number and 9.7 percent in dollars. Therefore, the effect of the recession on employees and business owners’ contribution to retirement plans are similar.)
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In short, while the recession was bad for everyone, it was particularly bad for small business owners. BLS data shows that job loss during the downturn worse for the self-employed than for those who worked for others. IRS data (which only go through 2008) show that small business income took a bigger hit than wage income between 2007 and 2008. To compensate, the self-employed reduced their use of health insurance and (like those who work for others) contributed less to their retirement plans to make up for their loss in income.
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Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool’s Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.