Self-employment and Local Economic Performance: Evidence from U.S. Counties

The financial crisis of 2007-08 resulted in widespread job losses, and the task of recovery has proven to be difficult. While the importance of entrepreneurship is well established in economic theory as well as political discourse, there has been a long-term decline in the number of jobs created by newly established firms in the United States.

A 2011 study from the Federal Reserve Bank of Atlanta and Pennsylvania State University, “Self-employment and Local Economic Performance: Evidence from U.S. Counties,” examines the effects of self-employment levels on income growth, job creation and poverty alleviation in metro and non-metro counties in the United States over a period of 30 years (1970-2000). The study, published in Papers in Regional Science, focuses on the significance of what the federal government categorizes as non-farm proprietors (NFP). “Although they are not a direct measure of entrepreneurship,” the authors state, “NFPs are full-time or part-time owners of small businesses who organize and operate a business, take risks and earn profits or incur losses.”

Key findings include:

• In non-metro counties, increased levels of self-employment — measured as the share of NFPs in total, full and part-time employment — were associated with strong increases in per capita income and job creation and significant reductions in family poverty levels.
• For metro counties, the effects of self-employment on income and employment growth were similar to those in non-metro counties. However, though entrepreneurship had a relationship with reductions in poverty, the correlation was not statistically significant.
• According to data from the U.S. Bureau of Economic Analysis, the absolute number of people registered as NFPs or self-employed in metro counties grew by 244% between 1969 and 2006, and by 93% in non-metro counties. In relative terms, the share of self-employed within the labor force grew from 14% in 1969 to 21% in 2006 in metro counties, and from 11% to 19% in non-metro counties. However, the growth in NFPs was uneven across U.S. counties.
• In 1969, average NFP income was $6,758 compared to $6,507 earned by salaried employees. By 2006 the difference in earnings widened to $12,041 in favor of salaried employees, with NFP income lagging that of salaries/wages. This gap could be due to under-reporting of income by the self-employed. Alternatively, low-productivity workers could be losing their jobs and are forced to be self-employed.

“The findings provide strong empirical support for the pro-small, local business prescription to accelerate local economic growth and reduce countywide poverty,” the authors conclude. “The results strongly suggest that policy-makers and local economic development practitioners should seriously consider strategic investments in NFPs, and that this growing sector of the economy warrants at least as much attention as industrial recruitment efforts which seek economic salvation from outside the county or state.”

Tags: employment, economy, entrepreneurship, small business

Tags: economy, entrepreneurship

By Pratibha Joshi June 7, 2012