Onetime magazine editor Camille Noe Pagán makes more money as a freelance writer and can spend more time with her daughter.
Photograph by Harvey WangOnetime magazine editor Camille Noe Pagán makes more money as a freelance writer and can spend more time with her daughter.

When you say “entrepreneur,” chances are you picture Bill Gates or Sam Walton, not Camille Noe Pagán, a new mom who lives in Brooklyn. Noe Pagán began her career as an editor at women’s magazines. Then she looked at the dismal salary scale up the chain of command and had a realization: “I would be able to make more money and have more freedom as a freelancer.” So in September 2004, she went to work for herself and promptly doubled her income, cranking out health and lifestyle articles for Reader’s Digest, Prevention, and other publications. All was not perfect: one magazine waited 14 months to pay her for a story she wrote in a few weeks. Another demanded work a few days after she gave birth to her daughter: no maternity leave for freelancers! But four years into her entrepreneurial adventure, she appreciates being able to spend lots of time with her kid, and the extra cash is welcome, too.

A growing number of Americans are joining Noe Pagán. In New York City, one of the few municipalities that tracks self-employment carefully, there were 807,750 self-employed workers in 2006, according to new numbers from the comptroller’s office. That’s about a fifth of the roughly 4 million nongovernment jobs that existed in the city before the current financial crisis. (These days, after all the layoffs, the proportion may be even higher.) And of the 773,000 jobs that Gotham added from 1981 to 2006, a stunning 491,000 were people working for themselves, making self-employment the biggest source of job creation in the city.

The same trend seems to be playing out across the country, though the numbers are slippery, thanks to varying definitions of self-employment, people who hold multiple jobs, off-the-books work, and other factors. The Bureau of Labor Statistics says that the national self-employment rate—the proportion of total employment made up of the self-employed—has hovered between 7 and 9 percent since the 1970s, but according to the Census Bureau, the number of “non-employer businesses” (that is, one-person shops) rose from 15.4 million in 1997 to 20.8 million in 2006. Further, the U.S. Small Business Administration (SBA) reports, the country had 4.5 million businesses with fewer than four employees in 2005; the owners of these businesses have much in common with true solo workers.

That’s a lot of people calling themselves boss—potentially 25 million in the 125-million-strong U.S. nongovernment workforce. Their proliferation raises broader questions. Who exactly are they? Is widespread self-employment good for the economy? And is it good for the self-employed themselves?

Entrepreneurs have long been American folk heroes, from Benjamin Franklin to the Google boys. In colonial times, the butcher, baker, and candlestick maker didn’t punch anyone else’s time clock. Then the Industrial Revolution changed the game and sent them to work at Tyson, Kraft, and GE. The trend reached its zenith in the Organization Man era of the 1950s, around the time that The Man in the Gray Flannel Suit hit theaters. “In the second half of the twentieth century, social scientists typically viewed self-employment as an obsolete remnant of past forms of economic organization,” note Richard Arum and Walter Müller in The Reemergence of Self-Employment. “Its small-scale mode of production was expected to disappear under the dominating logic and competitive pressures of capital accumulation and mass production.”

But then this inexorable march stopped. The self-employment rate, difficult to calculate though it is, seems to have bottomed out in the 1970s and then risen. Economists debate the reasons for this, but at least one is that businesses began to outsource heavily, increasing their efficiency by focusing on what they did best and shedding everything else. Today, corporations outsource report-generating to freelance writers, conference-organizing to event planners, and recruiting to independent headhunters. The outsourcing reduces companies’ overhead and payroll-tax burden. Self-employed workers are responsible for paying their own taxes, usually quarterly. The companies also need fewer administrators and less office space.

Above all, firms that outsource work to freelancers or small businesses don’t have to pay these contractors’ health insurance, which has become astonishingly expensive. According to the Kaiser Family Foundation, the average annual premium for family coverage hit $12,680 in 2008. Companies are thus more eager to hire workers as independent contractors, who would never expect benefits, than as employees, who probably would. (Though businesses are usually not required to offer health insurance to their employees, Kaiser found that 99 percent of firms with more than 200 employees do.)

In theory, companies can’t simply replace all their full-time employees with independent contractors. According to the IRS’s website, the “general rule” is that you’re an independent contractor if the person for whom you work has “the right to control or direct only the result” of your work, not “the means and methods of accomplishing the result.” But that “general rule” seems made to be bent. “The world is changing way faster than the laws that regulate work have,” notes Sara Horowitz, executive director of the Freelancers Union, a New York City–based advocacy group. “It’s a mess out there. It’s like the Wild West.”

Until recently, for instance, writer Rachel Ament worked at the magazine Quick & Simple from 10 to 6 daily, though she was paid as an independent contractor. “My status as a freelancer really just means I don’t get health insurance, even though I am working full-time on-site,” she said at the time. Staff jobs were hard to come by: “It seems like these days, half of the people I know in magazines are on-site freelancers.” Lots of people want to work in media, entertainment, and other creative fields, a fact that bids down the price of labor and makes it tempting for companies to see how flexible the independent-contractor definition can be.

While lean business models and the cost of benefits do conspire to push people off the corporate payroll, there are pull factors, too. For one thing, technology has slashed the barriers to starting a small business. For a few dollars a month, anyone can throw together a website advertising goods or services that will be instantly visible to the planet’s 1.5 billion Internet users and far cheaper than the catalogs of yore. Also, the self-employed report higher levels of job satisfaction than other workers do, according to one 2004 study in the Journal of Small Business Management.

And as millions of parents like Noe Pagán have found, self-employment can accommodate personal demands far more easily than a traditional, inflexible nine-to-five cubicle job can. Economist Sylvia Ann Hewlett’s 2002 book Creating a Life set the punditry buzzing with its discovery that 49 percent of corporate women earning more than $100,000 per year were childless at age 40. Less hyped was another finding: that only 22 percent of comparably high-earning self-employed women were childless at that age.

The pull factors are stronger than they used to be. “Traditionally, self-employment has been countercyclical,” points out Frank Braconi, the chief economist in the New York City comptroller’s office. “When the economy went down—when wages and salaries went down—self-employment went up.” That was evidence that “people were being forced into self-employment as a response to losing their paid, salaried jobs.” But in New York City, at least, that has changed. “The increases in self-employment are not so countercyclical any more,” he says. They’re neutral—“which is indirect evidence that more of the self-employed today are self-employed through choice than was once the case.”

The self-employed come in a variety of forms. A loose taxonomy might start with “soloists”: purposefully independent workers who ply their trades for multiple clients. In Michigan, for instance, Lynne Meredith Schreiber began freelance writing and editing a decade ago because the publication she worked for paid a mere $26,000 per year. These days, she’s making six figures as a marketing and communications consultant with her own business, Your People. “There have been times throughout the past decade when I have asked if I would be better off if I worked for somebody else,” says Schreiber. But her answer every time is “no—the freedom, the possibilities, are just too compelling.”

Not all soloists work in creative fields, of course. Old-fashioned Joe-the-Plumber types, electricians, and even physicians often work for themselves. While soloists sometimes bring in associates to take on extra work, or hire support staff, they’re usually selling their expertise, so they tend to grow by raising their rates rather than expanding headcount or product lines.

Then there are the microbusiness owners: more traditional entrepreneurs who sell goods, rather than their services, and therefore don’t face the same growth limits that soloists do. The ladies who make up the Austin Craft Mafia, a consortium of independent craft businesses in Texas, are good examples. Jenny Hart’s Sublime Stitching sells hip embroidery patterns; Jennifer Perkins’s Naughty Secretary Club sells handmade jewelry and home decor online.

A third category is “permalancers,” who look a lot like traditional employees but are paid as independent contractors for business reasons. Rachel Ament is one. Another is Gene Solomon, a veteran New York City taxi driver. When he began driving in 1977, most cabbies were employees of big garages. Then in 1979, the city’s Taxi and Limousine Commission (TLC) ruled that garages could remove drivers from the payroll and treat them as independent contractors—which the garages, seeing the upside of pushing benefits, taxes, and the risk of slow shifts on drivers, immediately did.

Now, three or four times a week, Solomon rents one of the city’s 13,000 cabs from a garage. A 12-hour shift, from 5 pm to 5 am, costs him $115 to $135 per night. He breaks even four to six hours into the shift; the rest is profit, though it’s not much. One 1994 study by the TLC found that the average cabdriver’s income was between $18,000 and $22,000; more recent estimates have put it at $25,000 to $30,000, “so far below the standards of American labor that it’s a disgrace to the city,” Solomon says. True, he likes being his own boss. But permalancers face the same risks and lack of benefits that soloists and microbusiness owners do—often without the creative and financial upsides.

The data show that self-employment does, on balance, benefit the economy. The mean earnings for the self-employed are higher than for people earning wages and salaries—in New York City, $59,390 versus $47,669. (The median earnings are lower, though; a few superstar entrepreneurs skew the average higher.) Also, according to one 2003 paper from economists John Baldwin and James Chowhan, self-employment pulled U.S. business-sector productivity up by 4.1 percent from 1987 to 1998. In theory, large organizations should be more productive than small ones because they can achieve economies of scale, but anyone who has sat through a 90-minute meeting watching colleagues jockey over who will respond to the client’s e-mail knows that the theory doesn’t always hold true.

Self-employment can also lead to larger-scale entrepreneurship, which creates jobs. After working at a New York public-relations firm for 12 years, Jill Goldstein decided to “jump off the ledge” and start J. Goldstein PR in 1998. The first project she landed was coordinating the U.S. launch of a then-unknown Australian children’s band called the Wiggles. The Wiggles hit it big, of course, and so did Goldstein: she’s still in business ten years later and now has two full-time employees. These are good jobs with salaries and benefits that wouldn’t have existed if Goldstein hadn’t chosen to work for herself. Some 12.8 million Americans work for businesses with one to nine employees, the SBA reports; even not counting one employed owner for each of these firms, you still have well over 7 million jobs created by extremely small enterprises.

In addition to being an engine of job creation, self-employment may reduce some of the labor market’s inefficiency. Companies tend to keep people on the payroll even when they aren’t needed because it’s hard to scale down. Independent contractors and soloists, on the other hand, can be engaged on demand, and each new project can be a new negotiation.

The rise in self-employment even leads to more flexibility in how people use space, since many people work from home in the self-employed economy. Marci Alboher, who until recently wrote the Shifting Careers column for the New York Times, is one of many independent workers in her Manhattan apartment building. The companies that purchase their services get to spend less on pricey commercial office space. The workers don’t have to commute, which gives them more time to work and cuts down on pollution as well. “Having a lot of self-employed people affects what a neighborhood feels like,” Alboher adds; for instance, people can shop for groceries at all hours, cutting down on the 6 pm crush.

Not all the economic news is good, though. Self-employment makes it easier for people to avoid paying taxes, because in many cases income is neither reported nor subject to withholding; the plumber paid in cash, for instance, may never inform the government of this transaction. An IRS study of 2001 tax returns randomly selected for auditing concluded that around the country, an astonishing 57 percent of nonfarm sole-proprietor income went unreported—amounting to $68 billion in uncollected taxes.

Self-employment also carries costs for the independent workers themselves. Their greatest problem is health insurance. During World War II, firms stuck with wage freezes doled out health insurance in lieu of cash. The tax code cemented the new relationship between employers and insurance, as did the simple reality that health insurance worked best by spreading risk over many people. When you come as an individual to buy health insurance, there is a “moral hazard”—the company wonders if you are buying insurance because you’ve just discovered that you’re ill. As a result, the market for individual health insurance is fragmented and prone to policies that put low caps on coverage and exclude even minor preexisting conditions.

This means trouble for the Noe Pagáns of the world. When she and her husband were both freelancing in Illinois, they paid nearly $1,000 per month in premiums; one reason he took a staff job recently was that adding their daughter would have been more expensive still. Though most self-employed people do have health insurance, the Agency for Healthcare Research and Quality reports that the self-employed are twice as likely as other workers to be uninsured. It’s likely that part of the rise in the nation’s uninsured—from 38.4 million in 2000 to 47 million in 2008, according to the Census Bureau—is due to rising self-employment.

The difficulties of health insurance can negate all the benefits of being your own boss. Dallas-based trucker Lyle Schiele used to own his own truck and contract with a major trucking company. He paid $760 per month for health insurance through that company. Then, in early 2006, after developing chest pains, he had two stents put in to unclog his arteries. As a result of his illness, he was medically disqualified from trucking for 90 days. Since he was a contractor, not an employee, he wasn’t covered by COBRA, the law that allows workers to keep their insurance after losing a job as long as they pay the full cost. So he lost his health insurance. After becoming healthy enough to work again, he tried to find a new policy. But with a huge preexisting condition, no one would take him. He ultimately sold his truck and became an employee of Schneider National, a trucking firm that provides health insurance.

The self-employed have trouble finding insurance even when they’re doing well financially. One 2008 Kaiser Family Foundation study found that of self-employed people who didn’t have access to group health-insurance plans—usually through a spouse—only 58 percent of those earning a full 1,000 percent of the federal poverty level had health insurance. (Ten times the poverty level is over $200,000 for a family of four.) Sure, some of these well-to-do uninsured workers are gamblers unwilling to pay premiums. But some can only get insurance that requires them to pay a huge percentage of the bill, making the whole endeavor seem worthless. Others can’t get coverage at all because of preexisting conditions.

What to do? The answer for many is to look to universal health insurance, and during the presidential campaign, Barack Obama had his sights set squarely on the self-employed when he proposed a guaranteed-issue public plan—with benefits similar to those available to members of Congress—that would be available to individuals and small businesses that wanted to buy in.

But a public plan is not the only option. Many self-employed people already use Health Savings Accounts—tax-free savings accounts tied to high-deductible insurance plans that Congress and President Bush created in 2003—to reduce their premiums. That’s probably part of the reason why, as Canopy Financial’s Health Savings Account Market Report mentions, HSA balances grew by nearly 20 percent in the second quarter of 2008. And plenty of freelancers are coming up with their own solutions. With no government help, some 19,000 independent workers have purchased health insurance through the Freelancers Union, which offers guaranteed-issue group-rate coverage in New York. A traditional plan runs $383 per month for individuals and $1,067 for families—almost exactly what the average corporation pays—and an extremely high-deductible plan can be had for $130 per month for individuals and $412 for families. “Freelancers in New York are in the exact same position they’d be in if they tried to purchase insurance through a large company,” the Union’s Horowitz says.

Some business groups in other states are starting to follow the Freelancers Union’s example. There’s no reason that such plans shouldn’t exist in every state: though state governments may have to help set them up, the plans become better bets for insurance companies as more people buy in and can eventually become privately managed, like the Freelancers Union’s. Indeed, since other states lack some of New York’s expensive regulations, a national law letting people purchase health insurance across state lines could allow the self-employed to hunt for the best rates.

Another problem for self-employed workers is saving for retirement. While only about one in five private-sector workers has a traditional pension now, big companies usually kick in something to 401(k)s—a perk that the self-employed lack. Social Security, too, is burdensome to self-employed workers, who must pay both the employer and employee parts of the Social Security tax—a full 12.4 percent on the first $102,000 of their earnings.

Independent contractors also have no access to unemployment benefits, since in almost all states, those benefits are funded through employer-paid taxes. In a 2006 online survey, the Freelancers Union found that 79 percent of self-employed, part-time, and temporary workers would be willing to buy into their state unemployment insurance systems. States could look into the idea, though defining unemployment for freelancers would admittedly be tricky.

Of course, the fact that so many freelancers would pay a tax to do something they could do by themselves—save to cover a rainy day—speaks to another reality. Unlike the traditional entrepreneur taking big risks to get rich, a lot of America’s modern independent workers—the permalancers in particular—are uncomfortable figuring out how to cope with risk on their own.

Their discomfort may have an impact on their voting. Historically, the self-employed have pulled the lever for Republicans, concerned about such standard business-owner worries as strict regulations and high taxes. But these days, fewer and fewer middle-income Americans are paying taxes; the Tax Foundation reports that households paying no federal income tax rose from 21 percent in 1990 to 33 percent now, and would rise to 44 percent under Obama’s proposed plan. As some of the self-employed leave the tax rolls, they will lose one reason to vote Republican. Many will also have a reason to vote Democrat: health insurance. “Several of my friends, once die-hard Republicans, have begun to lean left since working for themselves or for a small company,” says Noe Pagán. “There’s nothing like a lack of health insurance to change your point of view.”

It seems paradoxical that a rise in self-employment might create a constituency for bigger government, but the modern economy is shaking up many old alliances. When a demographic is diverse enough to contain both Bill Gates and a Brooklyn mom, both a Dallas trucker and a top Manhattan publicist, allegiances will be a bit muddled. What is clear is that as the Republican Party struggles to fight its way out of the political wilderness, it can’t take today’s entrepreneurs for granted.


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