Today's "Entrepreneurs" Are Really Just Disgruntled Contractors

Yesterday's enthusiastic entrepreneur is today's begrudging self-employed worker. So says Robert B. Reich, the former Labor Secretary. Why, Reich asks, does the Kauffman Index of Entrepreneurial Activity show a higher number of new entrepreneurs in 2009 than in the past 14 years, topping even the dot-com boom of 1999-2000? Why, frankly, would anyone want to start a business during a recession?

The answer, he finds, is that the term "entrepreneur," while technically a correct description of the self-employed individuals steering clear of the typical job route, is a bit misleading. A good portion of 2009's new entrepreneurs are simply laid-off workers who are hired back by their former employers as "contractors" via temp agencies. Their 9 to 5 jobs may have returned, but their benefits — health, dental, sick leave, paid vacation — are nowhere to be found.

This explains the atypical demographics of 2009's entrepreneurs: most new startups, find the report, were driven by 35 to 44 year-olds, followed by 55 to 64 year-olds. "Forget Internet whiz kids in their 20’s," writes Reich, "It’s the gray-heads who are taking the reins of the new startup economy." For senior citizens over 65, pending retirement was replaced by hesitant entrepreneurship, with self-employment ranks swelling a full 29 percent. "Many older people who had expected to retire discovered their 401(k)'s had shrunk and their homes were worthless," Reich explains. "So they became 'entrepreneurs,' too."

There are no racial divisions here; Reich writes, "entrepreneurship increased more among African-Americans than among whites." In short, the people who've suffered the most from the recession — older and minority workers — are now going the self-employed route.

Reich blames this burgeoning form of entrepreneurship on the unique recession America is facing. In a typical recession, unemployment rates rise because companies aren't hiring — not because they go on a firing spree. In the case of the ongoing economic crisis, however, employers have laid off their workers left and right, replacing them with cost-effective technologies and, you guessed it, contracted labor. While a W-4 employee is required to receive benefits, a 1099 contractor isn't. According to Reich, this trend "explains why almost half of America's unemployed have been jobless for more than six months — a greater proportion than at any time since the Great Depression." The jobs, at least in their pre-recession forms, simply aren't coming back.

If that's the case, how do we go about protecting those workers who no longer enjoy the security of a full-time, benefit-rich job? Reich comes to the rescue with a couple ideas of his own. "For starters," he writes, "they could use what might be called 'earnings insurance' that would pay for up to two years part of the difference between what they earned on the old job and what they earn now on their own." In other words, if you made $40,000 in your old job but can only rope in $30,000 as a self-employed contractor, your earnings insurance would pay a portion of that $10,000 difference for a couple years, just until you find your entrepreneurial footing. And just like unemployment insurance, earnings insurance would be deducted through employed workers' payroll taxes.

But the self-employed need more than income supplementation; they need assistance saving up for retirement. "Since they can no longer depend on tax-free corporate matches to their 401(k)'s or I.R.A.'s, they should be entitled to tax credits that match them," suggests Reich. This sort of tax credit would provide an incentive for entrepreneurs to plan ahead financially.

We need to stop thinking about widespread job loss as a temporary phenomenon and realize that for many individuals, especially seniors and minorities, self-employment is here to stay. Let's figure out how to make it work for everyone.

Photo credit: cwbuecheler