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November 25, 2012

Charles Lawton: Enterprises without employees hold promise for Maine

An important but often overlooked segment of the economy is the non-employer sector. It encompasses businesses that have no paid employees and are subject to federal income tax.

They include sole proprietors (individuals operating unincorporated businesses), partnerships and S corporations whose earnings are treated as the personal income of the owners.

Such enterprises make up the majority of businesses in the United States, but account for less than 5 percent of total business sales. In 2010 (the most recent year for which the Census has published the data), Maine had 110,374 such non-employer business enterprises, and they reported total receipts of nearly $4.5 billion.

By comparison, the Maine Department of Labor reported a total of 49,082 business enterprises that did have employees (a total of 577,986) who earned total wages of $21.6 billion.

In short, Maine had more than twice as many businesses without employees as with employees, and the average revenue earned by those non-employer businesses ($40,564) exceeded the average wage ($37,341) paid by all the enterprises with employees.

Clearly, total business revenue is not comparable to wages paid, but it is an indicator of what the average non-employer business owner is taking in and thus of the potential for such enterprises to contribute to the overall growth and prosperity of the Maine economy in ways not reflected in the employment and unemployment numbers that dominate headlines and most economic analysis.

It is interesting in this regard to look at the trends in the non-employer sector over the Great Recession.

Overall, the number of non-employer enterprises in Maine dropped by about 8,000 between 2007 and 2010, and their total revenue fell by about $40.6 million.

But nearly half of the drop in the number of enterprises and over 80 percent of the drop in revenue was accounted for by firms in the construction sector. Independent contractors in the construction trades make up the largest portion of Maine's non-employer sector, and it clearly was devastated by the recession.

But other sectors have fared better. Nearly one quarter (23,243) of Maine's non-employer enterprises in 2010 were in education services, information, professional, scientific and technical services, and arts, entertainment and recreation. Together, the number of these enterprises remained the same over the 2007 to 2010 period. And their total reported revenue ($584 million) dropped only 3 percent from 2007, less than half the overall state decline of nearly 8 percent.

While 23,000 independent tutors, Web designers, videographers, artists, programmers, architects, engineers, surveyors and other associated independent business owners do not yet constitute a major sector in the Maine economy, they do represent many of the qualities virtually every economic development promoter in Maine seeks to recruit -- knowledge-based skills, able to work virtually anywhere and creative/entrepreneurial attitude.

If each one of these businesses could be persuaded to hire just one person, we could reduce our unemployment rate in half instantaneously. And if two or three of these 23,000 sole proprietors could grow to become a major employer, we could advance our state's prosperity tremendously.

Maine would do well to find ways to identify, better understand and encourage expansion by our truly small businesses.

Charles Lawton is chief economist for Planning Decisions Inc. He can be reached at:

clawton@planningdecisions.com





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