This paper engages a new data base to examine the relationship between prior employment status and the creation of new business ventures. The new data base, the Wells Fargo/NFIB Series on Business Entries and Exits, improves on existing efforts primarily because it encompasses the individual and the business, and because the data is collected shortly after culmination of the entry process.

The first conclusion developed from this data set is that unemployed people are disproportionately likely to go into business for themselves. This finding is consistent with prior studies which have tied the employment status of individuals to their subsequent propensity to form businesses. The primary difference in result between this research and others also tying individual (pre) to individual (post) is that the authors find the unemployed are only marginally more likely to enter. Evans and Leighton, and Segal, found the rate about double. The variance could be attributed to a number of factors including differences in the time periods examined and the data sets used.

A preoccupation with entries by unemployed people obscures entries from those out-of-the-labor force. The second conclusion this paper reaches is that the non-employed enter at least three times as often in absolute terms as the unemployed. Proportionately, however, the non-employed enter less frequently. While the number of cases is relatively small, students and, to a lesser extent, housewives are the people most likely to form new businesses directly from non-employment. Non-employed students appear to form businesses in rough approximation to their share of the population -- housewives (non-employed) at about half that rate. Retired people go into business for themselves infrequently on a proportionate basis.

It has long been recognized that the overwhelming majority form very small, part-time, even marginal businesses. The current research confirms that truism. Depending on the definition employed, anywhere from 6 to 29 percent of the de novo starts are substantial entries. However, in the paper's third major conclusion, employment status prior to entry appears directly associated with the extent of business activity undertaken. Given the relative financial positions of employed and unemployed people, one assumes the former will initiate larger, more complex ventures. That occurs. Those entering from employment were more likely to have employees other than the owner(s), "partners," a primary location outside the home, and a business telephone number. The non-intuitive part of this conclusion is that non-employed entries closely resemble employed entries, at least according to the indicators available to the authors. No differences exist in the two groups for all practical purposes. That means the de novo formation by the unemployed contrasts sharply with the formation activity of both the employed and the non-employed.

Founding a firm and purchasing one are different types of business formations. The data confirm existence of the differences. In particular, those who purchased businesses were more likely to be involved with substantial entries, using the most rigorous definition of substantial entry, than were those starting them. But, they were no more likely to be involved in non-substantial entries. The gap is accounted for by the relatively high number of de novo starts involving full-time self-employment without other employees, a less rigorous definition of substantial entry. A large number of purchasers buy what appears to be a minimal amount of assets (considered a business) to recycle into a marginal or part-time operations.

The employment status prior to entry distributions of those starting and those purchasing were virtually identical. Among the start group, those employed and those entering from out-of-the-labor force formed businesses with similar profiles. That was not true of the purchase group. The non-employed purchased businesses with a somewhat different profile than did the employed. The unemployed formed different ventures from either the employed and non-employed in both the start and purchase groups. Perhaps most striking was how infrequently the unemployed entered with partners or investors (12%). The other two groups were more than twice as likely to have such support.


Implications and Questions

This research establishes the significant role played by the non-employed in business formation, at least vis-a-vis the unemployed. But beyond mere numbers, what is that role? How do the non-employed interact with the unemployed? Are they complementary in terms of business formation? Or, do they substitute for one another? Are the non-employed "pulled" in? Or, are they "pushed" out? Is the 16 percent entering from the ranks of the non-employed constant over time and space? Or, is the number contingent on the economic condition and/or the number of healthy non-employed? How has the increased population of women business owners affected the phenomenon and, in turn, been affected by it? These are difficult questions, but should serve as a basis for a better understanding of the relationship between employment status and business formation.

We now know that the businesses non-employed people start resemble businesses the employed start. The unemployed start less substantial operations than either of the other two. Why is that so? How can the non-employed produce operations of that size? What is the role of the two-income family? How do the non-employed differ from the unemployed?

The research results suggest a large group of potential business owners lie outside the scope of most small business assistance efforts, public and private. Targets of opportunity appear to be students and housewives, though no one should forget that people currently employed provide the overwhelming number of entries. The corollary is that the unemployed are not a tempting target given the lack of substance in the preponderance of their initiatives. If the public sector targets them, it should be for social rather than economic purposes.

We have long known that the proportion of substantive entries is low. Until now, we did not know how low. A marginal or part-time operation is not necessarily bad -- it can grow or otherwise serve the owner's objectives. But, why are they so small? Are the owner's objectives modest? Is there a lack of resources? What about a "toe in the water," i.e., slide in and see how things go, phenomenon? To what extent is business formation a transition occupation until something more attractive appears? Does the initial size of these firms imply that substantial turnover is inevitable and not of concern?

One person is involved in the purchase of a business for every four involved in a start. The proportionate employment status of those entering through a purchase is similar to those entering through a start. Does that suggest that the choice of a purchase or a start is random? Is that distribution constant over time and space? Does the choice influence the number of formations?


A Final Note

It is important that the reader remember that the focus of this analysis has always been on the individual who formed the business. The focus has not been on the business. Individuals are not a substitute for businesses because more than one individual is often involved in the formation of a single business. The reverse is also true, but it occurs less frequently. Thus, the analysis focused on the business rather than the individual would yield different figures, though its tenor probably would not change substantially. At a later date, we will know with certainty.

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Last Updated 1/15/97 by Geoff Goldman & Dennis Valencia

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