EVIDENCE FROM THE WELLS FARGO/NFIB SERIES ON ENTRIES AND EXITS

A better data set for exploring the relationship between new formations and employment status would allow researchers to examine the transition to self-employment without the potentially significant "no information period" resulting from the "averaging" question format found in the Current Population Survey. It would also permit researchers to determine if the business was substantive and if it was purchased, founded or transferred. The Wells Fargo/NFIB Series on Business Entries and Exits contains these desired characteristics. This new series, begun in 1995, screens 36,000 households with 72,000 adults annually to determine their participation in any business formation and/or termination in the prior six months. The Gallup Organization collects the data by telephone monthly and weights the responses to adjust for underrepresented populations.

When a survey respondent passes the screen regarding participation in a new business venture, he or she falls into a reasonably brief sequence of questions about their person and their business. One of those questions asks if the individual was employed 30 days prior to opening the business. If the answer is "no," the interviewer asks what they were doing. Possible responses include: unemployed, student, housewife, disabled, retired and other.

The survey also contains questions allowing analysts to determine the level of business activity. The more important of these for present purposes requests the number of hours per week the respondent worked in the business during the first month of operation. A related question inquires about the firm's non-owner employment. The survey also contains inquiries about the existence of a business telephone number, whether or not the the principal business location is in the home, and the existence of business "partners." These questions, singularly or in combinations, permit analysts to sort substantive operations from less significant activity.

The survey obtains data on the method of entry, i.e., founded, purchased, transferred. Purchased or transferred, e.g., inherited, businesses may or may not be classified as formations or entries. We take no position on that issue here. However, by separating them, the series provides flexibility not available elsewhere.

 

Employed, Unemployed, and Out-of-the-Labor Force

One thousand two hundred sixty-two (1,262) reported founding or purchasing at least one business during the 12 months that the survey was conducted. One thousand two (1,002) started a business; 260 purchased a business; a small number had a business transferred to them, and were excluded from this analysis. Table 2 presents the employment status of those people founding a firm 30 days prior to its opening. Of the 79 percent who started their firms, 75 percent were employed; 6 percent were unemployed; and, 16 percent were non-employed. The non-employed group included: three percentage points retired, three points students, four points housewives, two points disabled, and five points "other."

"Other" contains two particularly important groups -- those working on their business, but not yet "open for business" and discouraged workers. Both appear small. Though no response class directly incorporates the former, respondents not choosing a class were allowed to describe what they were doing 30 days before going into business. Only a handful volunteered that their primary employment 30 days out was working on the business. "Discouraged workers" are that group of the unemployed that have given up looking for work. Since no one calls himself a discouraged worker, one might conclude that the "other" class consists primarily of discouraged workers. However, those leaving the military or a volunteer position could also classify themselves in this manner -- so could a widow or widower, or even a "househusband." The constitution of the "other" class is, therefore, unclear.

Similar distributions occur among those who purchased a business (Table 3). Just over 70 percent were employed 30 days prior compared to six percent unemployed and 17 percent out-of-the-labor force. Seven percent did not respond. Of those non-employed, two percentage points were students, six points housewives, four points retired, two disabled and three "other."

 

The Contribution of the Unemployed

A disproportionately high percentage of those entering a business come from the ranks of the unemployed. But, it is only modestly higher. Throughout 1995, the national unemployment rate moved between 5.4 and 5.8 percent. Five point seven (5.7) percent of those in the sample who formed businesses (founded and purchased) were also unemployed. The figures in the two populations are virtually identical, but they use different bases.

The national unemployment rate excludes from its count anyone not seeking work, i.e., those outside the labor force. The Wells Fargo/NFIB series includes those entering from out-of-the-labor force. Thus, the denominator of one or the other data sets must be adjusted to achieve comparability. The adjustment can be made in the Wells Fargo/NFIB series by excluding those cases originating from out-of-the-labor force (205) and no answers (54). When completed, the unemployed constitute 7.3 percent of those forming new businesses; the employed constitute 92.7 percent. As a result, the entry rate of the unemployed is about 1.75 percentage points or one-third higher than would be expected from a random draw.

The estimates produced here are lower than Evans and Leighton's. There are a number of possible reasons for the difference: measurement over a different time frame, treatment of incorporated entries, and different sample sizes. But, it is not obvious in which direction these differences push. Since incorporated businesses are usually larger and more stable, their inclusion by the Wells Fargo/ NFIB series suggests the authors' estimate is more reasonable. The larger samples of the CPS lends credence to its side. The differing time frames produce similar (average) unemployment rates, though a lower labor force participation rate in the earlier period, and an unknown effect.

 

The Contribution of Those From Out-of-the-Labor Force

Out-of-the-labor force produces the second largest group of people forming new businesses. Their proportion is almost identical whether the definition of a formation includes or excludes purchases. Representation from this group is about 2 times that of the unemployed, though only between 20 and 25 percent of the employed.

No one population from the non-employed group dominates. However, it appears that students form businesses in rough proportion to their numbers in the population. Table 4 presents the distribution of the adult population by economic activity (or lack thereof). It shows that students aged 16-24 represent seven percent of the above 16 population, split almost evenly between those in and out of the labor force. (The total population 16-24 is over 30 million of which students are somewhat less than half.) But, in the survey an employed respondent would not have had the opportunity to indicate that he was a student unless he failed the employment screen. Students not in the labor force constitute 3.6 percent of the population and three percent of those forming businesses.

Housewives, not in the labor force and under 65, enter business in about half as often as their proportionate share. They represent eight percent of the population and form about four percent of the businesses.

Retirees form very few businesses compared to their share. Since the definition of disabled varies from ordinary views of disability to the expansiveness of the Americans with Disabilities Act, no effort is made to determine the relative share of this group.

TABLE 2
Employment status of people founding businesses 30 days prior to
opening by selected indicators of business substance - 1994 (unweighted)

EMPLOYMENT STATUS

INDICATOR Employed Unemployed Out of Labor
Force
Other Total % N
Total 74.6%/747 5.7%/57 16.1%/161 3.7%/37 100.1 100.2
        Total - % Total - N
Hours/Week
<20
20-39
40-59
60+
N/A

24.1
23.0
22.8
28.1
2.0

8.8
35.1
17.5
36.8
1.8

22.4
26.7
21.7
24.8
2.5

22.1
23.5
21.5
27.3
5.7

221
235
215
274
57
Other Actively Involved
Yes

No
N/A
27.2
72.4
0.4
12.3
87.7
0.0
26.7
73.3
0.0
26.4
73.2
0.4
265
733
4
Home-Based
Yes

No
N/A

68.8
30.4
0.8

77.2
19.3
3.6

70.8
28.6
0.6

69.3
29.7
1.0

694
298
10
Bus. Tel. No.
Yes

No
N/A

46.9
52.1
1.0

40.4
56.1
3.5

48.4
50.9
0.6

46.2
52.6
1.2

463
527
12
Employ Others
Yes
No
N/A

22.5
77.0
0.5

10.5
87.7
1.8

20.5
78.9
0.6

21.4
77.9
0.7

214
781
7
Substantial Entry+
Yes
Yes, home
Self, office
Self, home
No

7.1
4.4
9.2
9.5
69.7

1.8
3.5
10.5
17.5
66.7

5.0
3.1
10.6
8.1
73.3

6.2
4.0
9.2
9.4
71.3

62
40
92
94
714

+See the footnote to Table 3 for definitions.

TABLE 3
Employement status of people purchasing bussineses 30 days prior to opening
by selected indicators of business substance - 1995 (unweighted)

EMPLOYMENT STATUS

INDICATOR Employed Unemployed Out of Labor
Force
Other Total % N
Total 70.4%/183 6.1%/16 16.9%/44 6.5%/17 99.9 260
        Total - % Total - N
Hours/Week
<20
20-39
40-59
60+
N/A

25.7
18.0
23.0
28.4
4.9

25.0
18.8
18.8
18.8
18.8

27.3
31.8
25.0
11.4
4.5

24.2
19.2
21.5
23.1
11.9

63
50
56
60
31
Other Actively Involved
Yes
No
N/A


28.4
70.5
1.1


12.5
87.5
0.0


31.8
68.2
0.0


30.0
69.2
0.8


78
180
2
Home-Based
Yes
No
N/A

51.4
45.9
2.7

68.8
31.3
0.0

59.1
36.4
4.5

51.9
45.0
3.1

135
117
8
Bus. Tel. No.
Yes
No
N/A

56.8
42.1
1.1

62.5
31.3
0.0

47.7
47.7
4.5

55.8
41.9
2.3

145
109
6
Employ Others
Yes
No
N/A

46.4
51.9
1.6

25.0
75.0
0.0

31.8
65.9
2.3

43.1
55.0
1.9

112
143
5
Substantial Entry+
Yes
Yes, home
Self, office
Self, home
No

22.4
4.4
3.8
6.6
62.8

6.3
0.0
6.3
6.3
81.3

11.3
4.5
4.5
4.5
75.0

18.1
3.8
3.8
5.8
68.5

47
10
10
15
178

+(Note to Tables 2 and 3) A"Substantial Entry" is defined as a situation in which the owner works 40 hours or more in the business, and the primary location of the business is not in the home, has a telephone number, and employs people other than the owner. "Yes, home" is defined identically except the primary location of the business is in the home. "Self, office" differs from "Substantial Entry" only in that the business employs only the owner(s). "Self, home" has the same conditions as the value above except that its primary location is in the home rather than elsewhere.

____________

The sizeable contribution of the non-employed to the totality of formations implies that this group cannot be ignored when assessing the relationship between employment status and formations. While their contribution is less than their proportionate share of the population, particularly among the retired, the absolute number of entries from those out-of-the-labor-force significantly impacts the total. The resulting issues are who? and how? Students and housewives appear to be the focus of the "who?" The focus of the "how?" is less clear, though utilization of the labor force participation rate in some fashion may help us better understand the relationship between employment status and new business formations.

TABLE 4
The civilian population aged 16 years and older and selected components
of the labor force by number, percent of the civilian population, and percent of subcomponent - 1994

 

 

Population
(inMillions)

% of Total
Population

% of
Heading

Civilian population (16 and Over)
CIVILIAN LABOR FORCE
Employed
Married Females - Under 65
Age 65 and Over
Students - Age 16 to 24
Unemployed
Married Females - Under 65
Age 65 and Over
Students - Age 16 to 24
NOT IN LABOR FORCE
Married Females - Under 65
Age 65 and Over
Students - Age 16 to 24
196.8
131.1
123.1
30.6*
3.7
6.2
8.0
1.4*
0.2
0.9
65.8
15.7*
27.2
7.1
100.0
66.6
62
.5
15.5
1.9
3.2
4.1
0.1
0.0
0.0
33.4
8.0
13.8
3.6
---
100.0
93.
9
23.3
3.0
5.0
6.1
17.5
0.3
11.3
100.0
23.9
41.3
10.8

*Estimated

Source: Employment and Earnings, Bureau of Labor Statistics, January, 1995.

 

"Substantial" Business Entries

Most new business are very small; many are marginal. For example, Table 2 indicates that 53 percent of all people founding businesses did not have a business telephone number in the first month of operation; half spent less than 40 hours a week working on the business in the 30 days after it "opened;" three of four reported employing no one other than the owner(s).

Substantial starts generally carry greater interest to researchers and policy makers than do marginal ventures. One reason for the difference is that substantial efforts are more likely to survive and prosper (Kirchhoff, 1994, Chapter 8). But what is a "substantial business entry?" Any definition of the term is arbitrary. However, the authors have defined substantial business entry in four different ways (Table 2) and calculated their frequency in the population. All four definitions require the individual to work at least 40 hours per week on the business during its first month of operation and to have a business telephone number within the first 30 days. Two other criteria -- employees other than the owner(s) and primary location outside the home -- slide in and out of the definition in varying combinations.

The most restrictive definition of substantial business entry includes 40 or more hours, a business telephone number, a primary location outside the home and employing people other than the owners. By this definition, six percent or about one in 16 de novo formations are "substantial entries." Employing businesses, whether or not located primarily in the home (and with the two common criteria), constitute about one out of 10. Non-employing businesses (other than the owners) are substantial in 18 percent of all starts -- half primarily located in the home, half located primarily elsewhere. Thus, between six and 29 percent of all starts are substantial entries depending on the preferred definition.

The substance profile of businesses purchased (Table 3) is somewhat different than the substance profile of businesses started. Not surprisingly, it more closely resembles more established firms. For example, purchased businesses are more likely to employ others, not be located primarily in the home, and possess a business telephone number. On the other hand, the purchaser works about the same number of hours as the founder and exhibits the same propensity to have "partners."

Those purchasing a business have about the same likelihood (in percentage, not absolute terms) as those who start one of not forming a substantial entry. However, the likelihood of purchasing a substantial entry under the most rigorous definition is three times as great as founding one. The difference results from the propensity to employ people other than the owners.

Combining the started and purchased groups into a single group of business entries changes our perspective on the formation process little.

 

Who Forms "Substantial" Business Entries?

Table 2 shows that the employed and the non-employed start businesses similarly. The "odd man out" is the group that founded their businesses from unemployment. For example, 27 percent of those entering from both employment and non-employment have others actively involved. Just 12 percent of those entering from unemployment do. Twenty-three (23) percent of those who were employed employ people other than the owners; 21 percent of the non-employed group do; but, only 11 percent of the unemployed employ others within the first 30 days. The exception to this "two versus one" pattern is hours/week spent working on the business in the first month of operation. No differences appear in the hours/week indicators.

The unemployed are just as likely as the employed or non-employed to start a business under one of the definitions of substantive entry, but they disproportionately fall in the least rigorous classifications. The employed and non-employed groups also are much more likely to found substantive entries under the strictest definition. As the definition of substantive entry eases, those entering from unemployment become more plentiful. Under the least rigorous definition, those coming from unemployment are twice as frequent as those coming from the other two groups. Such entries fit the image of the full-time consultant working out of the house with a separate phone line and a computer.

The relationship of business characteristics to the owner's prior employment status is not as stark among those who purchase ventures. Hours worked has no regard for prior employment status. Others actively involved reverts to the employed and non-employed versus unemployed pattern. The first two are alike and the third is very different from the other two. Home-based finds an equi-distant step pattern with unemployed the most frequent, non-employed 10 percentage points fewer, and employed eight percentage points fewer yet. Possession of a business telephone number introduces still another pattern.

One point is clear: substantial entries of purchased businesses are much more likely to be associated with people previously employed. Almost one in four of the employed who purchase buy a substantial business under the most rigorous definition. That figure drops in half among the non-employed, and half again for the unemployed. Under all four definitions, the employed produce substantial entries 18 percentage points more frequently than the unemployed. This should not be surprising given that cash to purchase a firm is more likely to be available to someone currently employed than someone who is unemployed.

Previous Page | Main Menu | Next Page

 

 

1997 Babson College All Rights Reserved
Last Updated 1/15/97 by Geoff Goldman & Dennis Valencia

To sign-up for the Center for Entrepreneurial Studies' publication lists,
please register with the
Entrepreneurship WebTeam.