Well, here's the thing about self-employment: It's easier to make a lot more money working for several client businesses during the course of a year than it is to make that much money from a single employer. That is especially true when you are getting paid according to what your service to the business is worth, versus what your time is perceived to be worth within the context of a corporate hierarchy. There are an awful lot of underpaid employees out there, especially in administrative services.

At the same time, it's great for the businesses involved because paying full time employees (including benefits, paid time off, facilities and equipment for them to use for work, etc.) can come to a lot of money. I once did a stint in the personnel office of a large medical facility, where I learned (to my amazement) that a new hire making $30K per year actually cost them $80K per year. Under those circumstances, they could hire the independent contractor and cheerfully pay them $20K more per year than a full time employee would get for the same work, and still save money.

And, because the independent contractor would be able to earn an income that was not constrained by the costs of benefits (not to mention the additional overhead generated by another body in the building), they have a better chance of earning enough money to be able to afford the benefits they give up by being independent.

At least, that's the theory. Clearly, some other issues would have to be addressed first, like our out-of-whack health care marketplace.

As you say, the savings to the businesses involved could be enough to pay for more traditional jobs or better salaries for the ones already there. And the increased revenues made possible for the independent contractor might perhaps go a long way towards addressing the persistent and widening income inequality that has plagued this country for a long time.

Well, to the extent that people need work/employment in order to earn money to survive, it's a problem. The focus on "employment", however, reflects a distinctly 20th century mind-set.

Self-employment will restructure some aspects of the economy because of the way it changes the nature of the employer/employee transaction (from "employer buying employee's time" to "business contracting for a certain type and amount of work") and the way it interferes with the government's favorite way of interacting with the majority of citizens. But I also think that self-employment will be good for growth because it removes or reduces quite a lot of the expense attached to running a business.

Part of the issue here has to do with classification. Are they "self-employed workers" (to be treated like employees) or are they "nonemployer businesses" (to be treated like small businesses)? Part of what makes independent contractors attractive to businesses in the context of hiring is that it costs a lot less, precisely because the business is not required by law to provide the benefits or worker protections they are for full-time employees.

I don't see the problem being that the law treats employment as a special kind of work, so much as that the people who measure employment treat self-employment as if it does not exist. I think it is more advantageous to the self-employed to treat them as independent businesses rather than simply a different category of employee (access to small business programs from the SBA, reduced paperwork for them and their client firms, etc.) but I also think it is important to make various sorts of social safety nets (retirement saving, unemployment insurance, disability insurance) more accessible to the self-employed.

I don't know that it is necessary to treat self-employment the same way as employment. It would be nice if the Bureau of Labor Statistics included new nonemployers in its monthly jobs numbers and devised a way to measure hiring of independent contractors by businesses to include that, too. The interactions between independent contractors and the firms that hire them are entirely excluded from economic data, which means that small business, microbusinesses and nonemployers don't get credit for the work creation (as opposed to "job creation) they do. That, in turn, keeps their value to the economy obscured from policy makers. Not a good situation.

That's not what I said. In fact, you make my argument for me. Yes, you need health insurance for when you get a chronic or catostrophic illness, when you need emergency room care or hospitalization. But if you are paying premiums for that stuff and for every time you visit a doctor for anything at all (no matter how minor), then your premiums will just keep going up and up and up because that's how insurance works: it costs more the more you use it.

My whole point is that if we would get back to using insurance the way the product is designed to be used, then the insurance would probably cost a lot less. Again, consider how much your auto insurance premiums would be if you used the insurance to pay for gas and oil filter changes.

Health insurance, as people use it now, distorts the whole system. And a lot of the conversation about "reforming" the system is essentially just talk about how to expand what we're doing now, when what we're doing now doesn't work. The government might be able to arrange matters so that everybody has coverage but that isn't going to bring premiums down. And for as long as people don't have to pay for their routine care directly, physician office visits aren't going to come down either. Everything in a market-based system that is supposed to work to adjust pricing to market reality doesn't work in the health care market place, and all because of the way the insurance gets between people and the services they require.

Of course people should visit doctors when they get sick. They should also visit doctors for reasonable, routine preventive care. But if we need some kind of system to finance those routine health care services, insurance is the wrong product. That's all I'm saying.

That would have limited value because such a tax break, for most nonemployers, wouldn't be large enough to make a difference. Average annual revenues for nonemployers (as of 2006) was around $46K. From a policy point of view, better for microbusinesses and nonemployers would be improved access to capital, access to affordable health care, streamlined small business procurement procedures and (especially for nonemployers) access to social safety nets.

I won't complain about the low tax rates (although nonemployers and microbusiness owners complain more about unfairness and complexity than they do about tax rates), but most nonemployers don't hire employees. They want to grow their revenues, not the size of their organizations, so they hire other nonemployers or microbusinesses. It accomplishes the same thing but it's more efficient and less costly. In fact, this kind of "create work instead of jobs" may be the biggest labor market trend of the future.

Well, both of you have brought up something really, really important: all of our social safety nets -- health insurance, retirement income, disability insurance, unemployment insurance -- all of it is tied to employment. The system does not contemplate nonemployers businesses: individuals without employers and without employees. When you have 21 million Americans left out of your system of social safety nets, you've got a problem.

I don't know if anybody has mentioned this but I have one fundamental question. Why is everybody so wedded to using insurance to finance health care?

Insurance is a product that is designed to cost more when you use it more. Think about your auto insurance. When you install burglar alarms, when you keep your driving record clean, when you live in lower population density places -- in other words, when you do things that make it less likely that you will need to file an insurance claim -- your insurance carrier rewards you with lower rates.

Same thing with homeowners insurance. When you install smoke detectors and security systems, your insurance carrier rewards you with lower rates for doing things to lessen the likelihood that you will file a claim.

Now, think about how much your auto insurance would cost if you were forced to use it to buy gas.

If we take it for granted that we must use insurance to pay for even routine doctors' visits, where the most expensive piece of equipment used is a stethoscope, then we doom ourselves to out of control costs because we are using a product that is designed to punish us for the desirable behavior because the more claims we file, the more the product costs.

Unfortunately, we are not even in a position to know whether or not routine medical care even needs to be financed, because people with insurance don't know how much the care would cost without it.

If I have insurance for my family, I am paying (let's say) $960 a month in premiums. One month, my only visit to the doctor is for my sick daughter. So, for that month, that doctor's visit has cost me $960 in insurance premiums and a $10 co-pay. But if I just go and pay for that visit out of pocket, it costs me $25! And I am not making this up, this is a true story.

How does this make sense?

Maybe we need to go back to using health insurance in the way that insurance was originally designed to be used: for expensive, unforeseen events that we work to keep from happening. Just like we drive carefully to avoid the accident that will damage us and our cars and cause our insurance premiums to rise, we should focus on being and staying healthy (diet, exercise, lifestyle, etc.) and buy insurance for the stuff we hope never happens: catastrophic care, chronic care, emergency room care and hospitalization.

I don't see how we'll ever be able to contain insurance costs when we keep using the insurance in a way that is designed to make premiums increase. A little outside-the-box thinking is needed here.

I would like to make you aware of a segment of the business population that is routinely ignored by policy makers but that is certain to grow in importance for middle class families over the next few years: that is, nonemployer businesses (firms with no paid employees other than the business owner or owners).

There were 20.8 million nonemployer businesses in 2006; as of 2005, they constituted 77% of all U.S. firms. Because they do not generate jobs as that process is traditionally understood and because, individually, their average annual receipts are relatively low, economists tend to dismiss them as irrelevant phenomena. However, I think it is important to keep in mind the important role they are coming to play in job creation.

In the current economic climate, I think you will find that the only still-functioning engine of job creation is self-created jobs from new nonemployer businesses. In 2002-2003 (our last recession), while the economy was losing an average of 38,500 jobs per month, new self-created jobs (i.e., new nonemployers) were launching at an average rate of 85,000 per month. It is reasonable to expect another, similar spike in the nonemployer population began this year.

In addition, nonemployer businesses often provide a workforce for other nonemployers, for microbusinesses, and for domestic corporate outsourcing. Contracting with nonemployers significantly reduces production costs for businesses and firms of all sizes are learning that it is much more cost effective for them to work with independent contractors than to create full-time jobs.

Since individuals forced into entrepreneurship in this way often discover that they prefer self-employment and do not return to the traditional workforce when the economy improves, the federal government should consider ways to support nonemployer businesses rather than viewing their existence as some sort of labor market failure.

In addition, part-time self-employment is also an income patching strategy being used in many households to offset the wage stagnation we’ve seen over the last decade. This has become an important survival strategy for lower and moderate income families.

In short, please be open to the idea that the nature of the employer/employee transaction is changing in ways that may be invisible to your economics team, largely because they are not currently being measured. At the same time, one thing is clear: regardless of what incentives you put into place, businesses will not create jobs unless they have sound business reasons to do so. Individuals, who need to provide for themselves and their families, will often self-create jobs when those businesses won't or can't create a job for them. Under the circumstances, it behooves your economic team to become educated about nonemployer firms.

While they may collectively generate only a small percentage of GDP on an annual basis (7.5% in 2006), the fact is that self-employment is what millions of Americans are doing right now. For that reason, if for no other, they are worthy of your attention and support.

If you have any questions or require further information, please feel free to contact me.

Dawn Rivers Baker
Editor/Publisher
The MicroEnterprise Journal