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Trends in GDP and self-employment of unincorporated enterprises, 1987 – 2005 ¹ 

by L. Rispoli ² 

Introduction

This study examines the economic activity generated by the unincorporated sector by analyzing trends in self-employment and GDP between 1987 and 2005. The importance of self-employed entrepreneurs has changed considerably in recent years. In 2005, there were over 1.5 million self-employed that were unincorporated, generating $93.2 billion of GDP. Its GDP experienced strong growth during most of the 1990s. The unincorporated self-employed created most of the jobs in the business sector during the 1990s, adding 410,000 jobs between 1990 and 1998. However, unincorporated self-employment receded from 1999 to 2005, and GDP in the unincorporated sector grew slightly slower than in the previous decade.

This paper provides estimates of GDP generated by self-employed owners of the unincorporated sector by industry. Unincorporated enterprises are typically small businesses. The study divides the GDP of the business sector into the unincorporated sector and the remainder, which represents corporations. Self-employed owners are typically small-sized enterprises in which the entrepreneurs mainly work on their own or with a few staff (either paid workers or unpaid workers, including family members).

Unincorporated enterprises cross many industries. They include landlords, insurance and stock brokers in the finance industry; physicians and dentists in the health industry; lawyers, accountants and consultants in professional services; general and special trade contractors in construction; owner-operator carriers in trucking; and farmers, owners of retail stores, barbers, hair stylists, housecleaners and so on.

This study shows that the trend in unincorporated business GDP changed between 1987 and 2005. Averaging 4.7% growth per year, it closely tracked the corporate sector (4.5% per year) between 1987 and 1997; but it grew at a slower rate between 1997 and 2005 (3.8% per year) compared to corporate GDP (6.4% per year).

Since understanding self-employment trends in the unincorporated sector requires calculating self-employment in the incorporated sector, the paper also looks at the part of self-employment that is incorporated. Close to 1 million self-employed were incorporated in 2005. The decision by the self-employed to incorporate depends on a number of factors. These include taxation and liability considerations, as well as overhead related to record keeping requirements (corporations must file annual financial reports). Moreover, at the time of this study, some professionals (such as lawyers, doctors and dentists) in several provinces were not permitted to incorporate.

The paper investigates the relationship of self-employment to macroeconomic conditions to determine if it has a similar profile to the unincorporated self-employment rate. Previous self-employment studies have typically treated self-employment as a homogenous group. This paper examines the differences in the two groups and finds that they react differently to macroeconomic conditions.

Incorporated self-employment grew substantially during the 1990s and continued to grow in line with GDP during the 2000s, unlike the unincorporated self-employed who declined in number. The evidence suggests that this shift did not occur because unincorporated enterprises became corporations. Different forces were at work in the incorporated and unincorporated sectors. The study finds the incorporated self-employment rate is positively correlated to overall GDP and not to changes in the unemployment rate.

The estimate for GDP of unincorporated enterprises is based on the methodology used by Rispoli (2009). Total nominal business sector GDP is separated into the portions coming from unincorporated enterprises and corporations. The corporate estimates for the period 1987 to 1996 were determined residually by subtracting the GDP of the unincorporated sector from aggregate business sector GDP. This was done since the corporate portion of GDP represents about nine-tenths of overall GDP. GDP in this paper covers only the business sector and excludes all activity generated by government, the non-commercial sector and owner-occupied dwellings, which together accounted for about 23% of GDP in 2005.

The National Accounts allocate the transactions in the economy into four sectors: households and unincorporated enterprises, corporations, government and external. This study estimates GDP of self-employed enterprises within the first sector—consisting of unincorporated enterprises. The GDP of self-employed incorporated enterprises is included with the remainder of the business sector, consisting of corporations. According to the Labour Force Survey, self-employment in unincorporated enterprises accounted for just over 60% of all self-employed enterprises in 2005.

GDP of unincorporated enterprises

Unincorporated enterprises contributed $43.7 billion of GDP in 1987, more than doubling to $93.2 billion in 2005 (Table 1). Unincorporated GDP produced by service industries grew even faster, increasing from $29.6 billion in 1987 to $71.3 billion in 2005, boosting the share of services in unincorporated GDP from 67.8% in 1987 to 76.5% in 2005.

Unincorporated enterprises in aggregate generated about 11% of total GDP between 1987 and 1997, falling below 10% by 2005 (Chart 1). The unincorporated share of services GDP peaked in 1993, then declined. The unincorporated share for goods-producing industries fluctuated around 8% between 1987 and 1997, and then gradually declined to below 6% in 2005.

The growth of GDP in unincorporated enterprises followed a similar trend to that of corporate GDP throughout most of the 1990s (Chart 2). Since 1997, however, the growth of GDP of unincorporated enterprises slowed compared to that of corporations. GDP of unincorporated enterprises grew at an average annual rate of 4.7% between 1987 and 1997 and 3.8% between 1997 and 2005. Corporate GDP grew at an average annual rate of 4.5% between 1987 and 1997 and 6.4% between 1997 and 2005.

Over the past twenty years, the shift to services has had a greater impact on the unincorporated sector than on the corporate sector. The increase in the share of total GDP between 1987 and 2005 accounted for by services was less pronounced for corporations than for unincorporated enterprises. The share of corporate GDP accounted for by services rose from 51.3% in 1987 to 54.6% in 2005, while the share of unincorporated GDP climbed from 67.8% in 1987 to 76.5% in 2005.

Industry Perspective

Much of the increase in unincorporated services came from professional services, administrative services, finance and health. The finance, health and professional services industries generated just over 40% of unincorporated GDP in 1987, rising to just over half in 2005.

The finance industry led the way with a share of 22.3% of total unincorporated GDP in 2005, up from 17.5% in 1987. This industry is primarily driven by lessors of real estate (landlords), who traditionally account for about four-fifths of the unincorporated GDP in the finance industry.

The health industry represented just under 19% of total unincorporated GDP throughout the period. Physicians’ offices represented less than half of the industry’s GDP. Since 2000, substantial increases occurred in other areas of the health industry (in particular acupuncturists, dental hygienists, denturists, dieticians, midwives, naturopaths, nutritionists and registered nurses) and child day-care services.

The share of unincorporated GDP accounted for by the professional services industry (the majority comprised of lawyers and accountants) jumped from 9.2% in 1987 to 12.5% in 2005. The increase in professional services came largely from lawyers, accountants and other professionals (including administrative management and general management consulting services, computer system design, management consulting services and veterinary services).

The remainder of unincorporated GDP in services came from industries that have traditionally been important in the unincorporated sector, including the retail, truck transportation, other services and food service and drinking places industries.

In the goods sector, there was a noticeable decline in the share of unincorporated GDP for agriculture, from 16.0% in 1987 to 7.5% in 2005. Conversely, the construction industry expanded, especially during the past decade, years characterized by a boom in housing starts.

Trends in self-employment

While estimates of self-employed GDP cover only the unincorporated sector, data from the Labour Force Survey on self-employment cover both the unincorporated and incorporated sectors. Trends in the unincorporated sector are potentially affected by events in the incorporated sector.

Total self-employment averaged 2.2% growth between 1987 to 2005, outpacing the 1.4% growth of employment of paid workers. The period between 1987 and 1999 was extraordinary for the self-employed, which accounted for about 4 out of 10 new jobs in Canada.

Between 1987 and 1999, the growth in self-employment came mostly from those who did not hire paid workers (close to 700,000), while only 90,100 jobs were created by those who hired paid workers. Gauthier and Roy (1997) suggested this large increase in own-account self-employment may have been the result of companies outsourcing labour to previous employees as they became self-employed. It is also possible that the increase reflected weak labour markets.

Most of the jobs in the early period (443,000) were created by the unincorporated self-employed. 513,900 jobs came from those who did not hire paid workers, growing an average of 2.7% per year between 1987 and 1999. The difference is accounted for by a drop in jobs for both paid workers and unpaid family workers working for the unincorporated self-employed. There were reductions of 23,100 jobs for the unincorporated self-employed with paid workers and a drop of 47,800 jobs for the unincorporated self-employed with unpaid family workers. The incorporated self-employed added 290,900 jobs: 177,700 of these jobs came from those who did not hire paid workers, and 113,200 jobs came from those who did.

More recently, unincorporated self-employment from 2000 to 2005 declined moderately by 41,100 while incorporated self-employment continued to grow, adding 178,900 jobs.

Unincorporated business and corporations

The previous section examined both unincorporated and corporate self-employment. This section examines total employment of unincorporated enterprises and corporations between 1987 and 2005. These employment numbers include both self-employed and paid workers for both business structures.

Employment in unincorporated enterprises grew at a faster rate than for corporations throughout most of the 1990s (Chart 3). Employment in unincorporated enterprises, however, declined after 1998, while employment for corporations continued to rise throughout the first five years of the 2000s. The entire decline in the total employment of unincorporated enterprises (self-employed plus their paid workers) was accounted for by the self-employed.

As with GDP, the shift in self-employment from goods to services was more pronounced for unincorporated enterprises than for those self-employed who incorporated. For unincorporated enterprises, the goods-producing industries share fell from 36.6% in 1987 to 25.4% in 2005. During the same period, the share of total self-employment in service industries increased from 63.4% in 1987 to 74.6% in 2005 (Table 2).

Despite the overall increase in self-employment, declines occurred in trade and other services. In the goods-producing industries, declines occurred mainly in agriculture, as its share of total self-employment fell from 21.2% in 1987 to 9.8% in 2005.

The increase in unincorporated self-employment occurred predominantly in professional services (with an increase of 6.3 percentage points in its share), business and other support services (up 4 points), finance (3.5 points), educational services (1.6 points), health (1.5 points) and information (1.2 points).

The industry distribution for incorporated self-employment has been fairly constant in the years between 1987 and 2005, during which time the share of self-employment in goods-producing industries fluctuated between 31.6% and 29.4%.

Substantial increases in incorporated self-employment between 1987 and 2005 occurred in both goods (127,000 jobs) and services (345,100 jobs). For goods, increases occurred primarily in construction. Gains occurred in most services, but especially professional services.

Cyclical elements of self-employment

Do changes in the two components of self-employment react similarly to cyclical changes or long-term trends in the economy?

There are the two schools of thought concerning the relationship between self-employment and economic conditions. The first suggests that individuals who are entrepreneurial can be pulled into self-employment. Self-employment in this case will be related to a wide range of factors, including long-term trends or a favourable macroeconomic environment. The second school of thought is that individuals are pushed into self-employment because they cannot find suitable paid employment during periods of economic hardship. If the pull theory applies, self-employment would not be related to unemployment. If the push theory applies, self-employment would be positively related to unemployment.

Chart 4 depicts the relationship between the unemployment rate and the rates of unincorporated and incorporated self-employment.

Long-term movements of the self-employment rate are quite different for the unincorporated and the incorporated self-employed. The unincorporated self-employment rate increased during the 1980s and early 1990s (periods of high unemployment), but it gradually declined through the late 1990s and 2000s (periods of lower unemployment) to rates comparable to those seen in the 1970s. This historical pattern accords with the argument that many unincorporated enterprises are formed during periods of weaker labour markets and subsequently disappear as labour market conditions improve.

In contrast, the incorporated self-employment rate gradually increased over this period step by step with GDP.

The rate of unincorporated self-employment has fluctuated around its long-term trend. It increased during the mid-1980s and mid-1990s, following recessions. This increase in the latter years of the business cycle suggests either that the push factor operated with a long lag or that there are important pull factors that operated during the latter half of the business cycle.

Summary

Unincorporated GDP tracked corporate GDP throughout most of the 1990s (growing 4.7% per year between 1987 and 1997), but grew at a slower rate between 1997 and 2005 (3.8% per year) compared to corporate GDP (6.4% per year). Unincorporated enterprises showed a substantial structural shift toward service industries, led by professional and administrative services, finance and health.

The growth of total self-employment from 1987 to 2005 averaged 2.2% per year, creating 812,500 jobs, outpacing the 1.4% increase for paid workers. The unincorporated self-employed created most of the jobs in the business sector during the 1990s, adding 410,000 jobs between 1990 and 1998. Job creation, however, decreased sharply between 2000 and 2005 for the unincorporated sector. Incorporated self-employment, on the other hand, continued to grow between 2000 and 2005 by adding 178,900 jobs. As was the case with GDP, the compositional shift in the industry structure from goods to services of the self-employed was more pronounced for unincorporated enterprises than for self-employed individuals who incorporated. The increase in the share of unincorporated self-employment in services occurred predominantly in professional services, business and other support services, finance, educational services, health and information.

Generally, the two components of self-employment reacted very differently to the macro economic climate. The rate of unincorporated self-employment was positively correlated to the rate of unemployment. The rate for unincorporated self-employment grew throughout most of the 1990s, while returning in the 2000s to rates similar to those seen during the 1970s. On the other hand, the rate of incorporated self-employment was strongly correlated to the underlying trend in GDP rather than unemployment.

References

Gauthier, J. and R. Roy. 1997. Diverging trends in self-employment in Canada. Working Paper R-97-13E. Applied Research Branch. Human Resources Development Canada.

Rispoli, L. 2009. Measuring the Contribution of Unincorporated Sector in the Canadian Economy, 1997 to 2002. Economic Analysis (EA) Research Paper Series. Catalogue no. 11-624-M No. 023. Ottawa: Statistics Canada.

Rispoli, L. 2009. Trends in Gross Domestic Product and Self-employment of Unincorporated Enterprises in the Canadian Economy, 1987 to 2005. Insights on the Canadian Economy. Catalogue no. 11-624-M, no. 024. Ottawa: Statistics Canada.

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