Small-Business Owners Still Waiting for a Rebound (Opinion)

Grow Your Business, Not Your Inbox

Stay informed and join our daily newsletter now!
Professor at Case Western Reserve University
3 min read
Opinions expressed by Entrepreneur contributors are their own.

Small-Business Owners Still Waiting for a Rebound (Opinion)

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. 

Related: The Twisted Logic Behind the Regulatory Freeze for Jobs Act (Opinion)

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.

Related: Should the U.S. President Have Business Experience? (Opinion)

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.

Related: 7 Reasons Small Business Supports Romney (Opinion)
 

More from Entrepreneur
Our Franchise Advisors will guide you through the entire franchising process, for FREE!
  1. Book a one-on-one session with a Franchise Advisor
  2. Take a survey about your needs & goals
  3. Find your ideal franchise
  4. Learn about that franchise
  5. Meet the franchisor
  6. Receive the best business resources
Make sure you’re covered if an employee gets injured at work by
  • Providing us with basic information about your business
  • Verifying details about your business with one of our specialists
  • Speaking with an agent who is specifically suited to insure your business
Whether you want to learn something new, be more productive, or make more money, the Entrepreneur Store has something for everyone:
  • Software
  • Gadgets
  • Online Courses
  • Travel Essentials
  • Housewares
  • Fitness & Health Devices
  • And More

Latest on Entrepreneur