Nonemployer Start-Up Puzzle

Understanding the dynamics of nonemployer firms has been an unsolved puzzle because of a dearth of data. Nonemployer firms represent three-quarters of the businesses in the United States but only 3 percent of business receipts. While they represent a relatively small share of economic activity, nonemployer firms are important as a gateway to becoming employer firms, providing flexible work opportunities and a path to economic prosperity. Using special tabulations from the U.S. Census Bureau’s annual nonemployer firm program, we find nonemployers have a startup rate nearly three times the rate of employer firms, 35 percent and 13 percent, respectively. Analysis of the determinants of nonemployer start-up rates across states and industries indicates that they seem countercyclical with respect to the labor market, while employer start-up rates move in line with the overall economic cycles. The determinants of start-ups have disparate effects on employer and nonemployer firms