Is the rise of self-employment a positive sign for the economy?

For more than a decade, but especially since the pandemic, the number of construction firms in the Kalispell, Montana, area has skyrocketed.

The vast majority of them, however, have no employees.

This long-standing industry trend intensified at the start of the COVID-19 pandemic as more people moved to the picturesque area and housing demand grew. Construction workers found they could take home more money as independent contractors.

“Their payment on their truck is more than my mortgage. But there’s a lot of money coming at them,” said Mark Freidline, executive officer at the Flathead (Valley) Building Association.

U.S. Census Bureau data show self-employment—or “nonemployer businesses,” as the agency calls it—in the home-building sector brought in an average of $134,000 before taxes in 2023.

On the other hand, the Kalispell area has also seen a boom in self-employment in sectors associated with gig work, such as delivery drivers. These businesses brought in an average of $33,000.

Similar trends are seen across the Ninth Federal Reserve District and nationwide, according to the U.S. Census Bureau.

Tessa Conroy, a University of Wisconsin–Madison economist who studies entrepreneurship and community development, said this shift in the labor market toward independent contractors may mean more flexible hours for workers and more ways to make a living.

But self-employment can also mean less stable incomes and lack of benefits, she said. “It’s not a costless trade-off.”

How have nonemployers grown?

Nonemployer businesses are mainly defined in government statistics by the type of tax returns they file.

But they take many forms. Some are full-time jobs for their owners, such as plumbers. Some are part-time gigs, such as taxi drivers dispatched by online platforms. Some involve significant investment, such as partners investing in homes for rent. Some involve much lower start-up costs, such as a housecleaning service.

In 2023, there were 781,000 nonemployers in the Ninth District. That means about 15 percent of the labor force is involved in some form of self-employment, even if just as a second job.

Since at least the late 1990s, the growth of nonemployers have outpaced employers, according to the U.S. Census Bureau. That trend accelerated during the pandemic.

Between 2015 and 2019, the number of nonemployers relative to the Ninth District population grew 0.8 percent a year (Figure 1). That rate nearly doubled to 1.5 percent between 2019 and 2023.

Nationwide the growth rate in the same two periods was 2.1 percent and 2.3 percent, respectively.

More current data based on applications for employer identification numbers (EINs) filed with the IRS suggest the trend remains strong in 2026. For many, even those without plans to employ, this is a key step toward starting a business because banks often require EINs to access business loans.

The Census Bureau distinguishes between applications that are likely to lead to employer businesses and applications that aren’t; one sign is an applicant saying they’ll hire. Based on this, nonemployer numbers are likely still outpacing employers (Figure 2).

What kind of employment is self-employment?

The nonemployer surge is a complex trend involving a variety of businesses under a variety of circumstances. The increase in real estate agents during the housing boom preceding the Great Recession involved different factors than the increase in delivery drivers when the COVID-19 pandemic caused many to shop from home.

Economists have identified a few factors involved, such as changes in technology. For example, online platforms have made it easier than ever for independent contractors to find customers. Automation may have led to a decrease in better-paying jobs, causing more workers to seek out supplemental income.

Economists have also linked the increases in nonemployer numbers to a lack of employment opportunity. Nonemployer businesses are more likely to be started by people who lost their jobs while employer businesses are more likely to be started by those whose employment status is voluntary. Gig workers, whose work is typically part time and without fixed schedules, are especially likely to be low-wage workers seeking supplemental income.

In her own research, Conroy and co-authors find that nonemployer numbers increase faster in areas with high non-White populations, which face higher unemployment and underemployment, and areas of high poverty.

“My top concern is the quality of employment for these nonemployer business owners,” she said. “The extent to which they’re doing this because they can’t make ends meet is concerning.”

Census Bureau data suggest that, on average, self-employment does not provide owners the equivalent of a living wage.

In 2023, the annual gross receipts of Ninth District nonemployers averaged $63,000 a year in current dollars. This is nearly identical to the national average.

The actual take-home amount for owners is likely much less.

IRS statistics show that net income reported on the tax forms of nonemployers nationally averaged about 30 percent of receipts. That implies net income is in the $20,000 range for district nonemployers. Take-home income may be different because deductions may not match expenses.

For comparison, a living wage in district states ranges from $43,000 before taxes in South Dakota to $50,000 in Montana, according to MIT’s Living Wage Calculator.

In business sectors the Census Bureau associates with the gig economy, average annual receipts were especially low at $27,000 a year (Figure 3). Outside of gig work, though, receipts averaged $72,000.

In both cases, take-home money is relatively low, likely because most nonemployer businesses are essentially part-time jobs, Census Bureau surveys show.

In the Ninth District, average receipts, adjusted for inflation, have been relatively stable for a decade. But in gig sectors, receipts have trended downward as the number of nonemployers have risen. Among delivery drivers, for example, average receipts fell from $33,000 to $14,000 between 2012 and 2023.

Over the same time frame, the share of gig-sector nonemployers increased from 14 to 21 percent.

In non-gig sectors, receipts trended upward. In residential construction, for example, they grew from $100,000 to $123,000 in the same period.

A sign of bigger things to come?

Another way to think about what nonemployers mean for the economy is whether owners expect to grow beyond self-employment.

Economists consider incorporated status an important economic indicator. Incorporation is beneficial for growing businesses, but is administratively and financially costly. Owners of corporations have more legal protections as employers and borrowers. Corporations also have more complex legal requirements that may result in higher spending on tax and legal services.

Owners would, therefore, have few reasons to incorporate unless they expect to expand.

In fact, economists have found that nonemployer corporations were significantly more likely to become employers than unincorporated nonemployers, meaning sole proprietors or partnerships.

Nonemployer corporations also earn more. In 2023, the average sole proprietor in Minnesota, Montana, North Dakota, and South Dakota reported receipts of less than $47,000 a year. The average corporation reported $158,000. Corporate receipts have risen over the years while sole-proprietor receipts have fallen.

In the Ninth District, the number of incorporated nonemployers relative to the population has fallen while unincorporated nonemployers has continued to rise (Figure 4). This contrasts with national statistics, where both nonemployer types have been growing.

While the number of employers in the district relative to population remains well above the national average (Figure 1), it is declining. The falling number of incorporated nonemployers in the district isn’t helping.

Disadvantages for the disadvantaged

Statistics show the rise of Ninth District nonemployers has been mainly driven by sole proprietors and by gig work, which are associated with low earnings and low growth potential.

But the relatively small number of nonemployers who are likely earning a living wage or higher, based on their receipts, is also growing.

Economists have found that owners who have the resources to invest heavily in their businesses tend to earn more. This goes for those with long-term contracts with other businesses also. Owners with fewer resources and less formal relationships with customers, including gig workers, tend to earn less and their income is less stable.

“They become even more vulnerable because they don’t have the stable schedule and the benefits,” Conroy said. “They’re more likely to suffer the ups and downs that come with economic fluctuations.”

There are downsides for high-earning nonemployers, too.

According to Freidline, many independent contractors enjoy high incomes because they don’t provide themselves with benefits. If they were employed, their employers would be required by law to provide benefits such as workers’ compensation and unemployment insurance. Workers’ preference for cash may be one reason the industry has shifted toward nonemployers.

But this is unsustainable and the builders association is persuading independent contractors to think about the future, Freidline said, “so they don’t get to where they’re 40 or 45 or 50, and they haven’t put enough in savings, and their body’s hurting, and they can’t do what they used to do.”