More than four years after the start of the Great Recession, unemployment remains stubbornly high, economic growth is tepid, and housing prices are still depressed.
But as bad as many Americans may still have it, what’s happened to small-business owners has been worse. Consider employment. Both the number of people working for others and working for themselves has declined since the Great Recession began. But job loss among the self-employed has been more pronounced. Bureau of Labor Statistics data indicate that between December 2007 and May 2012, the number of people employed by others declined by 2 percent. Over the same period, the number of people working for themselves fell by 4 percent.
The Great Recession also took a bigger bite out of the incomes of self-employed people than those working for others. Data from the 2010 Federal Reserve Survey of Consumer Finances show that the income of a typical family led by a self-employed person declined 11 percent in inflation-adjusted terms from 2007 to 2009, while that of a typical family led by a wage earner rose 1 percent.
Economists have identified several reasons the economic downturn and weak recovery have disproportionately affected small-business owners. Part of the effect lies in the tendency of business owners to absorb the burden of a bad economy. Many businesses try not to cut wages or lay off employees. That means the self-employed often suffer larger income drops than those working for others.
But in the current downturn and weak recovery, that general pattern has been exacerbated by small-business owners’ disproportionate exposure to real estate. For one thing, a high percentage of small companies are in the construction and real estate industries.
What’s more, small-business owners took on a great deal of real estate debt in the years before the economic downturn. Not only did a quarter of small-business owners borrow against home equity to finance their companies, but they also were more likely to take on more home-equity debt in general. Federal Reserve Survey of Consumer Finances statistics show that the value of home-equity debt for the typical household headed by a self-employed person increased 48 percent between 1989 and 2007. In contrast, among those working for someone else, the value of home-equity debt for the typical household actually fell 29 percent over the same period.
This greater borrowing means that real household debt was higher among small-business households than others when the housing and financial crises hit. In fact, Federal Reserve data show that families led by those in business for themselves had debt about 50 percent greater than that of families led by people working for others.
Helping small-business owners now won’t be easy. There is little policymakers can do to help them improve their economic situations without fixing bigger problems in the real-estate and construction sectors.
And therein lies the crux of the problem. All policymakers, regardless of their political persuasion, want to fix our nation’s real-estate problems. But thus far, the Washington brain trust hasn’t come up with a comprehensive solution. Until policymakers do, it’s hard to see how the greater economic pain of small-business owners can be lessened in any significant way.
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.
Scott Shane is the A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University. His books include Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by (Yale University Press, 2008) and Finding Fertile Ground: Identifying Extraordinary Opportunities for New Businesses (Pearson Prentice Hall, 2005).