The Self-Employment Exit Rate is Rising

More people are quitting self-employment these days than were giving up two decades ago, analysis of Bureau of Labor Statistics data reveals.

The figure below shows the annual self-employment exit rates calculated from Bureau of Labor Statistics (BLS) data. It indicates the number of people exiting unincorporated self-employment every year as a percentage of the number of people engaged in that activity that year. As you can see from the solid line in the figure, the exit rate fluctuates a lot from year to year, but as the dotted line indicates, the linear trend is upward.

These estimates come from a combination of sources.

The Ewing Marion Kauffman Foundation, a Kansas City-based Foundation focused on entrepreneurship, produces an annual index of entrepreneurial activity in the United States. One of its measures is non-self-employed proportion of the U.S. adult-age population that transitions into unincorporated self-employment every month, which it generates from the Current Population Survey, a joint effort of the Census Bureau and the BLS.

Because the BLS also publishes monthly data on the number of unincorporated self-employed in the United States, we can calculate the annual rates of entry into and exit from self-employment every year since 1997.

The total number of unincorporated self-employed Americans has declined substantially over the past two decades. In June 1996, 10,660,000 Americans worked for themselves in unincorporated businesses. In June 2016, 9,794,000 did. That 866,000 person decline represents an 8.1 percent fall in the stock of unincorporated self-employed people over the past two decades.

The Kauffman Foundation estimates that in 2016, the 283,908 more people transitioned into unincorporated self-employment status than did so in 1997.

A little basic math tells us that if the rate of transition into unincorporated self-employment has grown, but the number of unincorporated self-employed people has fallen, then the rate of exit from unincorporated self-employment must have gone down. In 2016, 226,908 more self-employed people quit working for themselves than did so in 1997.

To understand what has happened, let me add two more facts to the mix. First, the rate of entry into and exit from self-employment correlated 0.87, which indicates that when one tends to go up, the other does as well.

Second, the number of people entering and exiting self-employment every year is high relative to the stock of people in self-employment at a moment in time. In 2016, the estimate from the Kauffman Foundation and BLS data are that about 6.6 million people will enter unincorporated self-employment and about 6.6 million people will exit unincorporated self-employment of a base of about 9.8 million self-employed people at any moment in time.

What Conclusion Can We Draw from the Rising Rate of People Leaving Self-Employment?

The big takeaway from these data are that the focus on entry rates alone are deceptive. Yes, the rate of entry into unincorporated self-employment is higher today than it was two decades ago. But so is the exit rate. That's why the number of unincorporated self-employed has declined 8.1 percent over the past two decades. Given the 18.8 percent increase in the civilian labor force over the same period, that's a heavy slide indeed.

Leaving Photo via Shutterstock

This article, "The Self-Employment Exit Rate is Rising" was first published on Small Business Trends