Cheap Labor 2.0: America’s Self-Employment Crisis

The reason our labor force and new business creation are both shrinking is that more and more workers are opting for self-employment. That’s not as good as it sounds.

The great dichotomy of the post-recession recovery is that America’s labor-force participation rate has declined to a multi-decade low, even while the unemployment rate has dropped from 10% to 5%.

The explanation, of course, is that millions of American’s have dropped out of the workforce. But it now appears that many, if not most, have reemerged as self-employed or independent workers – a growing trend that’s expected to continue for years to come.

While that may sound like a positive movement, a closer look at the data reveals some troubling implications, both for those individuals and the U.S. economy as a whole.

According to a report by MBO Partners – which provides software tools for self-employed professionals – there are now about 30 million full-time or part-time independent American workers. That’s 12% more than five years ago and the number is expected to rise to 37.9 million by 2020.

The dramatic increase in self-employment also explains why the massively hyped entrepreneurial craze has failed to produce more startups and small businesses. According to U.S. Census Bureau data, new business creation has been rapidly declining for decades. It now appears that millions have opted to be solopreneurs, instead.

While it’s comforting to finally make sense of data that, until now, didn’t seem to add up, and it would seem that American workers are at least attempting to control their own destiny, this massive flight to entrepreneurship is not all it’s cracked up to be.

Millennials Go Solo

The MBO report says that 30% of all full-time independent workers are Millennials. That would explain why unemployment and underemployment rates among Millennials are nearly twice that of the general population. It also explains why the so-called entrepreneurial generation has failed to live up to its hype, creating just 22% of all new businesses in 2013 – even fewer than their baby boomer parents.

Clearly, the growing trend of fewer new businesses and a smaller labor pool is bad for the economy. And while I appreciate that the newest generation to join the workforce is opting for the perceived freedom, flexibility and control of self-employment in droves, that doesn’t mean it's a good career move, as we’ll see in a minute.

The “Gig Economy” is just Cheap Labor 2.0

The “on-demand” or “sharing economy” may be all the rage, but I seriously doubt if driving an Uber cab, renting out your room on Airbnb, working for an online content mill, or buying and selling used stuff on eBay (NASDAQ:EBAY) is a smart long-term career choice. Even if you’re combining multiple gigs, you’re never going to get ahead that way.

According to MBO, independent workers generated $1.15 trillion of revenue last year. That may sound like a lot, but it’s not. It means that 17% of the working population generated just 7% of the nation’s GDP. Indeed, the average income for a self-employed worker works out to be just $38,000. In other words, independent workers are significantly underperforming relative to the rest of the labor force.

In reality, the “gig economy” is just Cheap Labor 2.0.

Being the Boss Is Highly Overrated

As the ranks of small business owners and the self-employed tend to learn sooner or later, the notion that entrepreneurs have more freedom, less stress, better work-life balance and greater fulfillment is a complete myth.

For one thing, personal fulfillment comes from enjoying your work and being proud of your achievements – whether you work for a big company, a small company, or yourself. And I’m sure a lot of people are happier without the headaches, risks, burdens and uncertainty of running their own company or being self-employed.

In addition, when you work for yourself, your home and work lives tend to bleed into each other. Many end up working constantly just to make ends meet. And since there are no benefits, if you’re sick or want to take some time off, it’s without pay.

And there’s an enormous burden to being your own boss. Not everyone feels more in control and less stressed when they have to wear a gazillion hats and manage all the finances, insurance, and overhead expenses you never have to worry about when you work for someone else.

Self-employed people will often admit that there are issues, but they usually fall back on the old refrain, “but at least I get to do it on my own terms.” Funny thing is, I’ve actually heard homeless street people say exactly the same thing. Working for yourself simply isn’t all it’s cracked up to be.

The bottom line is this. While technology has leveled the playing field and given us all a choice between working for someone else and working for ourselves, if we choose the latter and become less productive, it’s a poor choice for ourselves and for the economy.