An Endangered Species

by: Doug Short

By Eric Schaefer of American Independence Financial Services

Each month the Bureau of Labor Statistics (BLS) issues two separate (but companion) reports to gauge the health of the nation's workforce. The first is the firm payroll survey. BLS economists survey a wide range of businesses, of different sizes and in a multitude of industries, to determine how the size of their payrolls has changed. The other, companion report, is the household survey. In it, respondents polled are asked whether or not they were employed in the preceding month, or, if their employment status has changed.

You may wonder why two reports are compiled? The answer is simple: about one in eleven Americans is self-employed. The typical self-employed individual is the sole proprietor of an unincorporated business in which he or she is the proverbial chief cook and bottle washer — providing all of the labor necessary to keep the enterprise up and running. Few such businesses have identity distinct from their owner operator.

Just as the family farm is a staple icon of rural America, so too does the mom-and-pop shop remain an image of Main Street U.S.A. in towns large and small. And, just as the family farm has withered in numbers, so too has the self-employed business. Today those who report to no one but themselves just survive on the fringes of the economy.

One measure to gauge the rate and extent of the disappearance of the self-employed is the ratio between respondents claiming employment in the household survey to the aggregate payrolls from the firm survey. Sixty-five years ago, in 1948, the ratio was 128. In other words, roughly one-in-five individuals accounted for their own livelihood. Today, the ratio hovers at 106, suggesting a much diminished minority are on no firm's payroll.

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This secular decline has been in progress for the past several generations with only the occasional recession to temporarily reverse the trend. A number of factors are responsible. Certainly the steady encroachment of government bureaucracy and regulation has not helped. Permits, licensing, zoning and regulation pose significant obstacles to anyone considering a new business, while constituting a source of time friction for those already operating a business. But government interference is only partly to blame. Even if government were to step aside, demographic and economic forces make self-employment a difficult proposition.

For starters, the suburbanization of America and the rise of the two-earner couple has changed tastes and preferences in ways fundamentally at odds with the capacity of small business. For starters, our car-centric shopping culture has created a preference for free-standing shops and businesses offering ample space for parking. To satisfy these preferences, a business must obtain more than just the lease on the corner shop. The time constraints of modern life have also rendered the sole proprietor obsolete. As consumers, we have become spoiled not just for choice but for convenience as well. When we shop, we want to do so at our leisure. Early opening and late closing hours, seven days a week, are difficult, if not impossible to satisfy, with a staff of just one. And, it is not just the corner grocery feeling these pressures. The neighborhood pharmacist has already succumbed and the family physician is opting to join an incorporated practice.

Long before the first Levittown was constructed and long before Sam Walton opened his first Wal-Mart (NYSE:WMT), small business was under assault from the demands of the modern consumer. In the 1920s and 30s, it was the Hartford brothers and A&P who were among the first to upset the competitive landscape. The trend has been ongoing for some time.

Although there has been much hand wringing and lamenting of Main Street's demise, there has been no chorus echoing the same refrain for the disappearance of the self-employed. This is surprising since the health of one depends in part on the vibrancy of the other. But even if their habitat is revived, we doubt the ranks of the self-employed will multiply.

Notes on Sources and Methods:

All data sourced from the Department of Labor (DOL) and is presented on a non-seasonally adjusted (NYSE:NSA) basis. In other words, the claims data has not been adjusted for observed past seasonal patterns which may inflate or depress employee levels relative to the trend for the year.

We have smoothed out fluctuations in the ratio of filings to covered persons using a 13 month running average (dark blue, solid line). The average is centered about the mid-point of each 13 month window. Correspondingly, there is no adjustment at beginning and end tails of the series.

In the narrative we cite statistics for the establishment and household surveys. Both are components of the Bureau of Labor Statistics (BLS) monthly Employment Situation report. The establishment survey estimates employment levels based on a sample of payrolls for selected businesses, non-profits and government entities. The household survey estimates employment based on responses from selected households.

(Sources: BLS; AIFS estimates.)

About American Independence Financial Services, LLC

American Independence Financial Services, LLC ("AIFS") is the investment adviser and administrator for the American Independence Funds. The firm is a limited liability company founded in 2004. It is majority owned by its senior management, who average over 25 plus years of industry experience and achievement. Today AIFS offers eight different mutual funds and manages approximately $1.1 Billion in assets on behalf of its clients.

Our "partnership" culture and boutique size helps keep us focused on finding investment managers and strategies which offer a real choice in the marketplace. We strive to deliver active management which beats passively managed alternatives over time. We also seek strategies which are innovative and address investors' needs.

We believe our lineup of investment strategies reflects our unique worldview. We invite you to visit our website to learn more about us and to discover our independent perspective on investing.

Important Disclosures

(c) 2013, American Independence Financial Services (OTCPK:AIFS). All rights reserved. Redistribution and quotation permitted with attribution to the author and source.

The views expressed in this document are based on political, market, economic and other conditions subject to change at any time. Data are acquired from sources believed to be reliable. But no warranties are made to the accuracy, completeness or timeliness of the data and information presented. Opinions expressed are those of the author unless indicated to the contrary. Nothing in this document should be construed or taken as financial or investment advice. Please consult with your financial advisor to discuss how the subject of this research report may impact your unique, individual circumstances.

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