With diminished prospects for wage-and-salary work in recent years and projections of sluggish growth for at least the near term, as documented in the Congressional Budget Office’s February report on the economy, it’s natural to look for alternative forms of employment as a way for older Americans to cope with the current macroeconomic climate. Self-employment–either incorporated or unincorporated–seems like one potentially fruitful option.
Many older workers already transition into self-employment later in life. Research based on the Health and Retirement Study (HRS)—a large, nationally representative dataset of older Americans—reveals that more than one in ten career wage-and-salary workers transition into self-employment prior to exiting the labor force completely. Further, the number of career wage-and-salary workers transitioning into self-employment later in life is much higher than the number of self-employed workers transitioning into wage-and-salary jobs. It gets better. Career self-employed workers are much more likely than their wage-and-salary counterparts to remain working at later ages—a key objective for many policymakers considering ways to mitigate the financial strains of an aging population.
As a result of these two trends (net positive transitions into self-employment and the longer working lives of the self-employed), the fraction of older workers who are self-employed increases dramatically with age. Among a group of career workers aged 51 to 61 in 1992, for example, the percentage who were self-employed as a fraction of those still working rose monotonically between 1992 to 2010 from roughly 20 percent to 40 percent for men and from roughly 10 percent to 20 percent for women. Moreover, evidence suggests that the Great Recession has not discouraged these transitions into self-employment.
Self-employment and risk
These data suggest that self-employment is already an attractive option for a large segment of the older population. The big question is whether older Americans who are not self-employed should be encouraged to try it.
One reason for self-employment’s appeal in recent years is the outlook for older Americans who are among the long-term unemployed. The length of the average spell of unemployment for Americans who are 55 and older has gone down recently, but remains high, at 46 weeks. In comparison, the average unemployment spell for younger workers is approximately 34 weeks. For these long-term unemployed older Americans, could self-employment be the solution to the lack of opportunities in wage-and-salary employment?
Consider the positives first. Self-employment offers the scheduling flexibility that older Americans rank high on national surveys. A recent AARP study revealed that older Americans value such flexibility even more highly than pension benefits. Indeed, all else equal, self-employed older Americans work fewer hours than wage-and-salary older workers do, presumably by choice.
Older Americans may also be in a better position than younger ones to become self-employed, in part because they are more likely to have the financial resources necessary to overcome a formidable barrier: access to capital. They can overcome this barrier because they’ve had more time to accumulate personal savings and more time to establish good credit. Older workers also have the advantage of decades of work experience: intangible skills and knowledge upon which they can draw when facing the inevitable challenges of self-employment. In fact, research by the Kauffman Foundation finds that the survival rate of new businesses increases with the owner’s age.
While all of these incentives are valid, any evaluation of policies to encourage self-employment must consider the role of self-selection. Transitions into self-employment are not exogenously bestowed upon people; rather, they are the calculated decisions of risk-takers who have concluded that the expected benefits of self-employment outweigh the expected costs. Perhaps more important, people who reach the opposite conclusion—that the expected costs outweigh the expected benefits—choose not to become self-employed. Policymakers should be cognizant of the often unobservable qualities that drive older Americans to make the leap from wage-and-salary employment to self-employment, and of the unobservable qualities that prevent others from taking a chance.
The financial security of older Americans is another concern. According to the Employee Benefit Research Institute’s latest annual Retirement Confidence Survey, the typical older worker has less than $25,000 in nonhousing, nondefined-benefit pension wealth. Does it make sense for these workers to bet what little they’ve saved? Making that bet even more daunting is the uncertain payoff of employer-provided pensions. A 30-year transformation in the world of employer—provided pensions is now more or less complete, with defined-contribution plans such as 401(k)s dominating defined-benefit plans in the private sector. This shift leaves older Americans today much more exposed to market forces than prior cohorts were. The long-term outlook for Social Security currently shows a sizable deficit as well, leaving little room for some kind of program expansion that might cover retirement income shortfalls.
Back to our initial question: Is self-employment the answer for an aging workforce and a sluggish economy? Self-employment may be an attractive and viable option for some older workers, and the jobs, goods, and services these people create will help the economy. For most people, however, the benefits of risking their security don’t outweigh the potential losses, especially given that time is short for many older workers to acquire the assets they’ll need for their retirement, let alone to recover from a failed business venture.
Kevin Cahill will present a more in-depth view of self-employment transitions among older Americans at the Eastern Economics Association meetings in Boston on March 8th. The views expressed in this article are those of the authors and do not necessarily reflect the views of the U.S. Bureau of Labor Statistics, Analysis Group, or ECONorthwest.