When The Going Gets Tough, The Tough Get Self Employedby
This recession is producing more than its share of budding entrepreneurs. Since last July, when the downturn started, the ranks of self-employed have swelled by some 240,000 people. Now, 8.97 million--almost 7.7% of all workers--are their own bosses, the highest level in 25 years.
Indeed, self-employment has been on the rise since the mid-1970s. More and more people, it seems, are willing to accept lower incomes and less security in return for more independence. New technologies such as faxes and powerful PCs make it easier to set up small businesses. And corporations are more eager to subcontract to lower-cost producers.
But much of the recent increase in self-employment has been, to say the least, involuntary. The downturn hit managers and professionals hard, especially in such industries as finance and retailing. Many of these laid-off workers count on generous severance packages and working spouses to cushion the financial risk of starting a new business. So far in 1991, some 16% of the clients at Right Associates, a Philadelphia outplacement company, are choosing to go solo after losing their corporate jobs.
But many of the new ventures may be short-lived. "A lot of people aren't cut out to go it alone," says James C. Cabrera, president of Drake Beam Morin Inc., a New York outplacement company. Many may start off undercapitalized, hurting their chances for success.
Even for successful startups, the financial rewards may be meager. Workers who lose their jobs and start a new business can expect to take a pay cut of at least a third in the first year, reports David Evans, vice-president at NERA, an economic consulting firm. IRS tax figures paint an even bleaker picture: The average income of a business owned by one person was only $13,871 in 1988, the latest year for which figures are available. When lawyers and doctors are excluded, this number falls to $12,352. Even allowing for a substantial understatement of income among the self-employed, that's not very impressive. "It's a gritty type of existence," says Richard Belous, senior economist at the National Planning Assn., a Washington-based research group.
Still, regardless of the bad income prospects, self-employment is likely to keep rising, at least into 1992. It usually takes six months to set up your own business, say experts. So workers who were laid off in the fall are only now getting ready to strike out on their own. Indeed, if the 1981-82 recession is any guide, the peak of self-employment won't come until a year after the economy turns around.