We released our annual small business trends list this week. We got a lot of questions related to our forecast that the recession will lead to increased numbers of small businesses in 2009. Many feel the number of small and personal businesses will decline in 2009 due to the recession. Here is our response.
Academic literature has long linked rising unemployment to increased small business formation and rising self-employment. A.R. Oxenfeldt argued in 1943 that when faced with unemployment, many will turn to self-employment. This is referred to as the "refugee effect."
More recently, the paper Does Self-Employment Reduce Unemployment empirically shows the refugee effect exists for OECD countries (click here for a summary). The paper also contains background and citations on the academic research on this topic. And although some studies question the refugee effect, most agree it exists.
U.S. data also shows that in the last 2 recessions small business formation has increased. Below is a chart from Warrilow showing SBA data on small business births and deaths. As the chart shows, small business births exceeded deaths during the prior two recessions.
These data are for employer businesses. We have less historical data for personal business (single person, or non-employer businesses) because the government has only been collecting data on them since 1997. But the 2001 to 2003 recession period saw the number of personal businesses grow from 16.9 to 18.6 million.
And while many forecast errors start with the words "this time it's different," there are several reasons why we think small and personal business formation rates will be higher in 2009 than in past recessions:
1. The costs of starting and maintaining a small or personal business are substantially lower than in past recessions. PCs, the Internet and low cost office and communications equipment make it much cheaper to start a small or personal business.
2. The risks of starting a small or personal business are lower. In the 80's and 90's starting or working for a small business was often viewed as negative by large corporate employers. This meant leaving corporate America to start your own business or work for a small business greatly reduced the chances of returning. This is no longer the case and many larger corporations now see it as a positive.
3. The demographic drivers are stronger than in prior recent recessions (see our trends post for details).
We believe small business failures will also increase in 2009. The recession is not going to be kind to many small and personal businesses. Also, many surviving small businesses will see their revenue and income decline in 2009.
But we think the net impact will likely be an increase in the total number of small and personal businesses in 2009.