Should We Count Non-Employer Businesses? - Small Business ...

An increasing share of American businesses have no employees. ?That trend makes it difficult to understand what?s been happening to American entrepreneurship over the past 20 years. Because non-employer businesses are so numerous and so different from employer businesses, the sliding share of businesses with employees makes it difficult to compare apples-to-apples over time in the small business sector.

The most recent data provided by the Office of Advocacy of the U.S. Small Business Administration shows that, in 2010, 21.7 million U.S. businesses were without employees, while only 5.6 million had them. At 79 percent of all American companies, the characteristics of non-employers swamp the overall data.

But non-employers account for very little of the economic impact of small businesses. Non-employer businesses are virtually a rounding error in the measurement of business sales. The most recent Census Bureau data show that non-employer firms accounted for only 4 percent of business receipts in 2009. The average non-employer business generated less than $40,000 in annual sales in that year.

Similarly, data released by the Office of Advocacy of the Small Business Administration show that non-employers accounted for only 7 percent of capital expenditures by U.S. businesses in 2009, the most recent year reported. And, of course, non-employer businesses accounted for none of the country?s employment. ?The economic impact of non-employer businesses is so slight that the Census Bureau refrains from measuring employer and non-employer businesses together.

Here?s an example of why: In 2009, the average capital expenditure of businesses with employees was $177,000, while that for non-employers was only $3,500.

Combining the two businesses often leads to estimates that hide what?s going on in the economy. For instance, the number of people working for the average U.S. business declined from 4.8 in 1992 to 4.3 in 2009, suggesting that the size of American companies is shrinking.

However, that trend is actually an anomaly of the increasing share of non-employers, which increased from 73.4 percent of U.S. companies in 1992 to 79.5 percent in 2010. Employer businesses have actually grown since the early 1990s, with average size of an employer business increasing from 18.2 to 19.9 between 1992 and 2009.

Similarly, average capital expenditures of U.S. businesses declined a slight 4.9 percent in real terms between 1997 and 2009. The decline in average capital expenditures was a much scarier-looking 28.4 percent in inflation-adjusted terms over that period when all companies are measured. That?s because most of the decline in capital spending comes from the rising in the share of non-employer businesses.

Patterns like these suggest that we need to understand why fewer and fewer American entrepreneurs are starting businesses with employees. Without knowing the answer to that question, just interpreting the data on small business will be difficult.

Question Photo via Shutterstock

About the Author

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: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

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