Small Business Labs

McKinsey finds 36% of Employed Americans are Independent Workers

McKinsey's Freelance, side hustles, and gigs: Many more Americans have become independent workers, covers the results from their American Opportunity study.

And this study found that independent work is booming. Key quote:

"... a remarkable 36 percent of employed respondents—equivalent to 58 million Americans when extrapolated from the representative sample—identify as independent workers. This figure represents a notable increase since we estimated the US independent workforce in 2016 at 27 percent of the employed population."

The study asks survey respondents to self-identify as independent workers. Those answering yes to either, or both, of these questions are considered to be independent:

• "Is your current job as a contract, freelance, or temporary worker?" 
• "Would you consider yourself a gig worker or part of the gig economy?"

The article covers a range of data from the study, but the data on how workers view economic opportunity jumped out at us (click to enlarge the chart below). Key quote:

"Given the broad range of reasons why people work independently, it's surprising how united this group is in one distinct characteristic: they are among the most optimistic workers in the country."

Striking out on one's own requires a certain amount of optimism.  So it's not surprising to us that independent workers, on average, are more optimistic about their economic opportunities than workers overall.  

See the article for more details.

New Business Applications Continue at Historically High Levels

The number of new business applications in July was 425,698, which is another strong month.

Although down from their all-time high in 2020, applications in 2022 have averaged about 420,000 per month. This is about 40% higher than before the pandemic.

The business application data comes from IRS Employment Identification Numbers (EIN) applications. EINs are the tax id number that identifies a business for tax purposes.

Most applications (about 70%) are from firms the Census calls "applications other than high propensity" (grey in the chart; click to enlarge).

These are applications from businesses that are unlikely to have employees, such as freelancers, independent contractors, and other types of solopreneurs.

"High propensity applications" (yellow in the chart) is Census speak for firms they think are likely to hire traditional employees.

As the above chart illustrates, the share of solopreneur applications has steadily increased over the past decade.

Retail continues to be the industry with the most applications. This has been the case since the surge of applications started in 2020. Professional services is second, consistent with its position since the pandemic began.

As we pointed out earlier this year, only about 20% of applications for tax I.D.s result in a new business starting.

But the continuing high levels of business applications means a corresponding surge in new employer small businesses and solopreneurs.

The Inflation Reduction Act and the Growth of Microgrids and Virtual Power Plants

The Inflation Reduction Act, which was just signed into law, has a variety of tax credits and incentives to encourage homeowners and businesses to install green energy systems.  

One of the biggest incentives is for solar power systems. The bill extends a current tax credit for ten more years and raises the tax credit to 30% of the system's cost.  

The law's various credits and incentives will lead to broader deployment of microgrids.

These are localized power generation grids that can disconnect from the traditional grid and operate autonomously.

They can also feed power back to the traditional grid.

The growth of microgrids is allowing the development of virtual power plants.  

Virtual power plant (VPP) consists of distributed microgrids that are used in concert to provide power plant levels of electricity to the grid.

An example is Tesla's virtual power plant agreements with California's two largest utilities.  

Under this agreement, Tesla connects Tesla Powerwalls (a battery storage device fed by solar panels) to the grid and supplies power during peak power usage. Tesla's Powerwall customers are paid $2 per kilowatt hour for contributing energy to the VPP.

Generac, which also provides solar systems with battery storage to homeowners and businesses, has a similar arrangement with Arizona's largest utility.

Given the advantages of distributed solar microgrid systems - cleaner energy, lower costs, resilience to outages - we expect the deployment and use of microgrids and VPPs to grow rapidly.

And as we pointed out in our article The Clean Energy Economy = Small Business Opportunities, the distributed nature of microgrids means numerous opportunities for small businesses.  

BCG on Tapping Into Fluid Talent

The global "Big Three" strategy consulting firm BCG recently released Tapping Into Fluid Talent. It covers their view that companies need to turn to new and diverse talent sources - including various forms of nonemployee labor.

The BCG chart below (click to enlarge) shows the alternative talent sources BGC suggests companies tap.

As with a recent MIT-Deloitte study, the BCG report suggests that companies need to develop new work processes, procedures, and management systems to support the shift to fluid talent. Key quote from the BCG report:

"Support fluid talent with a new operating model. Companies that have experimented with fluid talent understand the need to adapt legal and procurement frameworks, rewire HR processes like performance management, build cross-functional project teams, and invest in change management. But to really unlock value from fluid talent, companies also need to rethink their ways of working and how they deploy and onboard talent."

This study again shows that the debate around whether or not nonemployee labor is an important and growing source of corporate talent is over. 

The focus now is on how to effectively build and manage workforces combining traditional employees and external talent.

This means greater of use of what BCG calls fluid talent.  

BTW, we already have too many buzzwords describing the various types of talent businesses employ.  So we hope "fluid talent" doesn't catch on.  

New Business Applications Continue to Surge

So far this year, new business applications - which are applications for a federal tax I.D. and tracked by the U.S. Census - continue to be at historically high levels.

Business applications have averaged about 420,000 per month through April in 2022 (click on the Census chart below to enlarge).

Although this is down from their all-time high in 2020, applications are still 40% higher than before the recession.

Most applications (about 70%) are from firms the Census calls "applications other than high propensity" (grey in the chart).

These are applications from businesses that are unlikely to have employees, such as freelancers, independent contractors, and other types of solopreneurs.

"High propensity applications" (yellow in the char) is Census speak for firms they think are likely to hire traditional employees.

As the chart illustrates, the share of solopreneur applications has steadily increased over the past decade.

Retail continues to be the industry with the most applications. This has been the case since the surge of applications started in 2020. Professional services comes in second, consistent with its position since the pandemic began.

As we pointed out earlier this year, only about 20% of applications for tax I.D.s result in a new business starting.

But the continuing surge in business applications means a corresponding surge in new employer small businesses, and solopreneurs.

We expect to see business applications continue to decline over the next year. Reversion to the mean is common after a major economic shock.

But we also expect new business applications and new business formation to continue to be higher than before the pandemic.

What is the Ownership Economy?

The VC firm Variant recently released The Ownership Economy - A primer on the state of Web3.  

Variant defines the ownership economy as:

"... the products and services that will define web3—and the next generation of the Internet—are those that transform users into owners. We call this the ownership economy."

The essay points to crypto tokens (also called social tokens) as the main method of transforming users into owners.

Crypto tokens are a form of cryptocurrency. Because of this, they have many features that make them a better choice than traditional equity for sharing ownership. Key quote from the essay:

"Tokens have a richer and more frictionless design space. They can be distributed programmatically, with the potential to reward participants versus those who buy-in; they are effectively free to deploy, and they can transfer value in the same way we transfer information—instantly, to anyone, anywhere in the world."

So, in theory, anyone who uses a digital product or service could buy, or be given, crypto tokens that provide ownership in the product or service - or at least some form of participation in the value created by the product or service.  

We've covered several examples of how this works in prior articles:

1. What are Social Tokens (also called Creator Coins) and Why You Should Care covers how creators use tokens to engage, build, reward, and monetize a community of fans and customers - and provide a way for the fans to benefit from being a fan financially.  
2. The Rise of Crypto Clubs covers how tokens are being used to create new member-owned social and business organizations. And because the members are also owners, they benefit financially if the organization has financial success.

The hope of the ownership economy - and Web 3.0 - is that the financial rewards generated by the Internet will become much more decentralized and democratized.  

In more simple terms, instead of VCs and company founders becoming billionaires while users get nothing, the wealth created by goods and services will be broadly shared with users.

This is hardly the first-time technology democratization claims like this have been made. So far, these claims have failed to materialize.

And although the four words most wrong in forecasting are "this time is different," this time could be different.

The essay's primary focus is to educate startups and founders on potential ownership economy opportunities.

The essay chart below (click to enlarge) shows the wide range of firms currently working in this area.

Many terms in addition to "the ownership economy" are used to describe how technology is empowering new ways for people to become entrepreneurs or solopreneurs.

These include the passion economy, the creator economy, the empowerment economy, the freelance economy, and - of course - the gig economy.  

But no matter what you call it, it's clear technology is creating more opportunities for people to become self-employed and owners.

The Shrinking American Middle Class

Pew Research's How the American middle class has changed in the past five decades reports that the share of adults who live in middle-class households fell from 61% in 1971 to 50% in 2021.

As the Pew chart above shows, while the middle-income share was falling, the upper-income tier increased from 14% in 1971 to 21% in 2021. Also rising was the share of those in the lower-income cohort, from 25% to 29%.

At first blush, these numbers don't look so bad. After all, increases in the upper-income cohort explain 63% of the decrease in the middle class.

But the Pew chart below tells a more troubling story.

In 1970, middle-income households accounted for 62% of U.S. aggregate income. But by 2021, their share had fallen to 42%. 

Meanwhile, upper-income households increased their share of U.S. aggregate income from 29% in 1970 to 50% in 2021.  

The main driver of the share growth is that the income of upper-income households increased by 38% more than the incomes of middle-income households - and by more than 50% faster than low-income households.

Pew didn't go deeper in this study, but a prior Pew report - Trends in Income and Wealth Inequality - reported that the top 5% of households saw the most rapid growth in household incomes.

In other words, much of the share growth in aggregate income by upper-income households is attributable to the fast-rising incomes of the top 5% of U.S. households.

Widening income inequality has a variety of social, political and economic impacts. Growing political polarization is one example. 

And an economic example is the growth of both dollar stores and luxury retail. 

Another is the rise of side gigs and the gig economy due to the increased need for supplemental income by lower income Americans.  

The trends driving inequality continue to be in place, and we expect income and wealth inequality to continue to increase.

Decision Making Lessons from Investment Biases

Fidelity's article  6 biggest pitfalls for investors covers human instincts and emotional biases that often undermine investment success.  

These include "aversion to loss and ambiguity, following the crowd, and focusing on information that's recent or confirms what we already believe."

Key quote describing the impact of these biases:

"Our brains evolved to protect us from all kinds of primal dangers—saber-toothed tigers, earthquakes, dodgy-looking strangers from the other side of the river.

Trouble is, the instincts and mental shortcuts humans developed to manage life-and-death scenarios aren't all that helpful when navigating the twists and turns of the economy or riding out a rocky stock market.

In fact, these tendencies aren't just unhelpful—they can be harmful. They often prompt us to make decisions that seem rational but are self-defeating."

The same biases also can lead to bad business decisions.

The six biases in the Fidelity article are:

1. Avoiding losses at all costs: Loss Aversion
2. I am the greatest: Confirmation Bias
3. Getting stuck on the first thing you see: Anchoring Bias
4. The breaking news problem: Recency Bias
5. There's safety in numbers: Herding Bias
6. The devil you know: Ambiguity Bias

See Fidelity's article for more details.  

We spend a lot of time identifying and analyzing how our biases impact our forecasts and the advice we give our clients.  

We've also covered our advice on dealing with biases in the past. But the key points are worth repeating. These are:

• try to base critical decisions on hard data
• get multiple perspectives on key decisions.
• identify and understand how your views and beliefs may be impacting your decision making
• be open to change and accept that even strongly held business views and beliefs will need adjustments over time.  

We've written a fair amount about decision-making biases in the past. These are consistently among our least read articles.  

But this topic is simply too important not to cover.  

Etsy Sellers Going Out on Strike

Back in February, Etsy announced that in April, the site's transaction fees would be increasing from 5% to 6.5%, a 30% increase.  

Not surprisingly, many of Etsy's sellers were not pleased. And to show their displeasure, sellers have called for a strike to take place the week of April 11th.  

The sellers are not just upset about the fee increase.

They have a series of complaints against Etsy, including their mandatory marketing fees, unfair deactivations, and the growing number of sellers who aren't selling handmade products.

The Verge's Etsy sellers will go on strike in April and want customers to boycott provides more details on the demands of the sellers. Key quote on what the organizer of the strike thinks might happen:

"What would happen if on April 11th, so many sellers put their shops on vacation mode that Etsy starts shitting bricks."

We hope they'll at least be handmade bricks.

The strike's organizers hope this is the start of a broader set of collective action by sellers. Again from the Verge article:

"The strike is just action number one," she says. "What we want to really do for the future is form a solidarity support movement — peer support, artisans supporting each other."

At a minimum, the strike has caught the attention of Etsy executives. 

Key quote on Etsy's response to the strike from Gizmodo's Etsy Sellers Are Going On Strike to Prevent It From Becoming 'The Next Amazon':

"We're committed to supporting our community of 5.3 million sellers around the world by helping them grow their businesses," an Etsy spokesperson said. "Sellers have consistently told us they want us to expand our efforts around marketing, customer support, and removing listings that don't meet our policies. Our revised fee structure will enable us to increase our investments in each of these key areas so that we can better serve our community and keep Etsy a beloved, trusted, and thriving marketplace."

Collective action by independent workers is hard to organize, and successes in doing so have been rare.

But we see more and more signals that workers of all kinds are looking to band together and collectively fight for their rights. This is yet another example.

McKinsey and Bain on the Economic Impacts of the War in Ukraine

McKinsey and Bain are two of the three "big 3" strategy consulting firms. They provide business and financial advice to large corporations, governments, and non-profits across the globe.

Each firm has recently come out with its views on the likely economic impacts of the war in Ukraine.

Both firms point out that while Russia, Ukraine, and Belarus are relatively small end markets, these countries are critical sources of supply for various global commodities. 

Because of this, they both believe the broader economic impacts of the war are potentially significant.  

The chart below (click to enlarge) is from Bain's Crisis in Ukraine: Respond and Reposition and it shows the significant exports of the three courtiers involved in the war.  

Food and energy are the biggest categories, but metals and other raw materials are also on the list.

Bain highlights too many potential impacts to cover here. But the big ones are increased inflation, supply chain disruptions, lower economic growth, and geopolitical realignment.  

McKinsey's War in Ukraine: Lives and livelihoods, lost and disrupted covers much of the same ground.

One of their most interesting observations is that there will be financial system ripple effects. Key quote:

The disruption of sanctioned financial flows has the potential to ripple through the banking system and financial markets, with significant repercussions for affected bondholders, lenders, aircraft lessors, derivatives counterparties, and investors. There remains a risk of contagion with second-and third-order effects across the globe.

An example is AerCap, the world's largest aircraft leasing company, which has filed a $3.5 billion insurance claim because they have 100 jets stuck in Russia.

This is one of the first of what will likely be a barrage of losses and legal claims caused by the war and related sanctions.  

Both McKinsey and Bain point out that the war has created a high level of uncertainty in the global business environment. 

We certainly agree and think small businesses should:

1. evaluate how exposed they are to the direct impacts of the war. Energy and food-related companies will be likely be directly impacted. But supply chain disruptions due to raw material shortages will also impact a variety of SMBs. And almost everyone will need to deal with higher inflation.  

2. have a plan in case the war and its effects push the U.S. economy into recession. The good news is that most economists are not currently forecasting a recession. But many economists are cutting their economic growth forecasts and suggesting a slowdown in global economic growth will happen.

3. the pandemic forced many firms to become more agile and resilient. War impacts may mean SMBs will need to redouble these efforts.

The Bain and McKinsey articles are an excellent places to start in terms of thinking about how the war may impact small businesses. They're well worth reviewing.

We'll have more on this topic in the near future.