Here’s where a lot of the workforce went

The old adage of getting horses to water but being unable to compel them to drink has application to trying to understand America’s labor markets today, which is still difficult at best. Many employers say they can’t get help (at least in terms of the wages and working conditions they offer) and the experts offer many explanations. People fear getting sick, they care for children and older relatives, many find themselves out of work because businesses have closed or lost business.

One factor that usually escapes mention is the number of people going into business for themselves. There is data called new business formations, based on IRS filings for Employer Identification Numbers (a business equivalent of a Social Security Number), available to the Census Bureau. Here is a copy of a chart covering the numbers up to December 2021.

There are a few caveats. The yellow area at the bottom of the chart is for so-called high-propensity filings, which have aspects that make them more likely to turn into companies with workforces. Companies that will become employers of many people. Some deposits come from companies. These can be special business vehicles to host an acquisition, asset purchase, general partnership or something similar. In the latest January 2022 figures, out of 430,411 filings, there were 140,174 high-propensity claims, including 49,295 with expected salaries and 51,914 from companies.

But that still leaves 290,237 people at low propensity, which likely means someone is starting their own business, either full-time or exploring opportunities on the side. The numbers are also seasonally adjusted, meaning economists try to account for normal variations. However, given the magnitude of the change in the numbers, the precision of these adjustments may not be very helpful. The actual fluctuations were larger. In unadjusted figures, the total number of claims for January 2022 was 445,536, or 3.5% higher.

The change in conditions has been staggering. Not just in the third quarter of 2020, when millions were out of work and people were desperate to earn money, but beyond that. Things seem to be calming down, but at a faster rate than before in history.

There is no explanation in the data for the sharp increase, just the numbers of requests. And that doesn’t include new businesses where people don’t necessarily apply for an employer identification number even if they’re starting a new business.

The numbers show that since the third quarter of 2020, there have been 7,776,928 new business apps, a large majority of which are low propensity, which likely means people are looking to go into business for themselves. Many of these people are women and minorities who are not fairly shaken up by the corporate world and have decided to strike out on their own and take control of their own destinies. They can structure their work around other aspects of their life without having to seek permission from a supervisor.

Will they all succeed? No. But many will, and those who fail in one area might move on, learning as they go to have a better chance of succeeding. Studies have also shown that people who are self-employed prefer to be. Few people would rather be someone else’s employee – and given all the noise about the few workers available to employers, they should have a fast path to worker status if they so choose.

Many politicians, working with unions, have pushed for new federal standards, like the ABC test which, if extended to various areas of law like President Biden and prominent Democrats have said they want the do, would make it impossible for many millions to continue their activities as independent contractors. Instead, they would likely become part-time employees of different companies, receive no benefits as they wouldn’t work full-time for any of them, and lose corporate tax status, which means they could not deduct standard business expenses.

It’s an ultimately stupid decision. Pointing to rideshare drivers and gig platform deliverers identifies only a small part of the overall group. If they are being abused, then by all means insist that the government apply resources to remedy the situation. But don’t assume that the small portion is the full representation of all, and that everyone is to be saved by being forced to be at the disposal of another, probably earning less with benefits worse than they can do by himself.

Michael A. Bynum