[Accessibility Information]

September 2004, Vol. 127, No. 9

Précis

Self-employment around the world
Goods output versus manufacturing production

Précis from past issues

Self-employment around the world

In countries around the world, many people think that owning one’s own business is a more desirable form of employment than working for others. A recent study by Dartmouth economist David G. Blanchflower, however, argues that self-employment may not be for everyone. Self-employed persons are highly motivated, driven individuals, who face considerable risks and often pay a high price for owning their own business; a price most people are not willing to pay.

Blanchflower presents data for 70 different countries, but focuses on comparisons between the United States and Europe. The study finds that in all countries, larger proportions of workers say they would prefer to work for themselves than actually do. In the United States, for example, 71 percent of the respondents to a survey covering 1997–98 indicated that they would prefer to work for themselves, but only about 7 percent actually were self-employed at the time. Similar disparities exist in Europe and the other countries, even when the proportion preferring self-employment is relatively small. At the same time, the proportion prefering self-employment varied considerably by country—from 27 percent in Norway to 80 percent in Poland.

Such findings present a paradox for economists, because economic theory suggests that as the labor market moves toward equilibrium, the demand for self-employment will meet the supply. Instead, it appears that in both Europe and the United States, there are numerous "frustrated entrepreneurs." This suggests that while many workers may be drawn to the idea of working for themselves, they face considerable constraints—personal and economic—against their becoming self-employed. They may also have an "unrealistically rosy view" of what it’s like to run one’s own business.

The study finds that self-employed workers are more satisfied with their jobs and pay than those who work for others. In addition, entrepreneurs tend to enjoy their work more than employees and spend less time commuting. On the other hand, the self-employed work many more hours than employees, often find their work stressful and exhausting, spend less time than they would like with their families, and find it difficult to devote time to nonwork activities. These findings support the author’s contention that self-employment is not for everyone. Although many people would like the benefits of owning their own business, they would not be willing to accept the costs of self-employment.

Goods output versus manufacturing production

"A curious phenomenon of the 2001 recession was the sharp divergence between two arguably similar economic indicators," opens Charles Steindel in Current Issues in Economics and Finance from the New York Federal Reserve Bank. He goes on to analyze the divergent patterns of the Federal Reserve Board’s own figures on manufacturing production and goods output as measured by the Bureau of Economic Analysis.

Manufacturing production, a component of the broader industrial production index, declined by about 6-¾ percent from June 2000 through December 2001. Over the next year and a half, there was very little growth in the index and it wasn’t until the middle of 2003 that the series began to recover more strongly. In contrast, goods output, a component of the gross domestic product accounts, suffered only a mild decline in the recent recession and displayed what Steindel characterizes as "sustained growth afterward."

Steindel found that there was an underlying definitional difference between the two series that would be a key to understanding the difference in trends. The measure of goods output included the output of service sector firms that were involved in bringing the goods to market. This helps explain the long-term divergence of goods output and manufacturing production in terms of the role of services in the sale of goods. First, because imported goods typically require more services to bring to market, the growing significance of imports and the fact that the U.S. service component of their sale is included in the goods output measure tends to raise goods output relative to manufacturing production. Second, there is evidence that the service component of all goods output—domestic as well as import—has risen over time.

In the cyclical time frame, however, a somewhat different dynamic is at work. In most recessions and recovery cycles, capital goods production and sales are more volatile than consumer-oriented output and sales. Such was very much the case in the 2001 recession: capital goods spending fell 8.4 percent from the first to last quarters of 2001 while consumer spending actually increased. Given the differential in the service content of these sales categories—consumer goods incorporate more service content than capital goods—it follows that goods output, which includes post-factory services, would trace a different course than manufacturing production, which excludes post-factory services.

Steindel concludes that where some have seen the current divergence between these two measures during the 2001 recession as unusual, what actually was different was the relatively close tracking between the two series in 1990–91. That recession was marked by an atypically large swing in consumer spending relative to capital goods spending.