Thinking of chucking the security of a job to become a soloist? Make sure you understand the forces that keep most people trapped in cubicles and dreaming of independence.
Remember free agent nation?
It was a pleasant conceit of the late 1990s, made up of equal parts fantasy, a tight labor market, and pure media hype. Free Agent nationalists argued that Americans by the millions would soon be out on their own as independent businesspeople rather than as employees. They'd pick and choose what they did, when they did it, and whom they did it for. Sayonara, time clocks and cubicles. Hello, entrepreneurial independence.
The prospective citizenry of this nation included a whole raft of new-economy professionals. Web designers, computer geeks, marketing mavens. Financial consultants, project managers, engineers. And, of course, writers and editors, which probably explained why the media loved the concept so much. "Free Agent Nation is the shape of things to come in the Internet century," gushed AOL Time Warner chairman Stephen M. Case on the jacket of the book (by Daniel H. Pink) that christened the concept.
And it all made so much sense. The necessary technology -- laptops, fast Internet connections, and cell phones -- was suddenly widely available at reasonable cost. The labor market was so tight that professionals could quit their jobs, hang out a shingle, and sign up former employers (at top dollar) as their first clients. The traditional alternative to self-employment -- a stable job with a big corporation -- seemed less and less attractive amid all the mergers and downsizing. Who wanted to labor for a soul-deadening company that couldn't even offer job security? Before long, nearly everyone knew two or three colleagues who had forsaken the cubicle for the home office. It all seemed like just one more step in the entrepreneurial revolution, the new American economy.
Alas, Free Agent Nation was only an illusion, and not just because the recent slowdown put the kibosh on a lot of entrepreneurial plans. Its partisans somehow managed to ignore (or bleep right over) some awkward statistics -- numbers that make the whole concept seem as evanescent as Enron's earnings. Worse, those same partisans seemed only dimly aware of why anybody would work for a company at all, when the reality is that only the brave, the foolish, or the unusually fortunate are ever likely to leave the cozy confines of an organization to strike out on their own.
Every month the U.S. government gathers data about the number of self-employed business owners. The number is based on what's known as the Current Population Survey; government researchers call up or visit a random sample of the population and ask them if they or others in their households are self-employed. Granted, that isn't an unambiguous question. Say you're a contract programmer on a six-month gig with Microsoft. Or suppose you're holding down a part-time job while trying to get a new recruiting business off the ground. The survey forms don't allow for "Well, sort of" or "Let me explain." So it would be a mistake to take that number as any kind of gospel.
Even so, wouldn't you think that the self-employment rate as measured by this metric would have risen steadily over the past decade or two? In fact, it did rise a little in the 1980s -- but it fell again in the 1990s. And anyway, the changes weren't very great in either direction. To go by that statistic, 9% or 10% of people in the nonagricultural labor force are self-employed, year in and year out. Where is Free Agent Nation in those numbers? Ask Robert W. Fairlie, an associate professor of economics at the University of California, Santa Cruz, who follows the statistics so closely that he adjusts them to include business owners who are not counted by the government and puts the corrected version up on his Web page. "I guess it's just a misconception," he says of the sense that there were swarms of independents out there in recent years.
Then there's the opposite side of the coin: employees on payrolls.
In 1980 about 85% of the labor force was receiving a paycheck from a company or government agency. (The rest were either agricultural workers, self-employed, or unemployed.) By the end of 2000 the figure stood at nearly 94%. Even in 2001, as the economy slumped, it was 92%. This number also has its complexities -- people with two jobs, for example, get counted twice -- but it too is moving in the wrong direction for the proponents of free agency. The conclusion is hard to avoid: part-time or full-time, temporary or long-term, in boom time or recession, nearly all working Americans are on some organization's payroll.
So why haven't more of us been going into business for ourselves during the past several years? Overall, we Americans yearn mightily for independence. According to a survey by Dartmouth College economist David G. Blanchflower and his colleagues, 71% of Americans would prefer working for themselves to working for an employer. Even allowing for a big fantasy factor, 71% is a very large amount indeed.
But there are a series of obstacles -- call them the last barriers to entry -- that keep most of us toiling in the organizational vineyards. Take them one at a time (the cost of health insurance; the need to fix your own computer when it crashes) and they seem more like nuisances than true barriers. Take them as a group, however, and they're enough to make you -- almost -- give up the idea that anything remotely resembling Free Agent Nation will ever materialize.
The fact is, working for an organization has been and remains one of the best deals around in pretty much every other way you can think of. Want to go out on your own? No problem, so long as you're lucky enough to have a ton of cash in the bank or a supportive spouse with a secure, high-paying job. Otherwise you'd better be sure that what's driving you is courage rather than foolhardiness. In leaving the corporate payroll you're up against a century of history in which nearly everything in our society conspired to push people into, not out of, organizations.
Early in the last century, in fact, America was about to embark on a different but even more momentous social development: the creation of what you might call Employee Nation.
Back then, big companies like Carnegie Steel (soon to become part of U.S. Steel) and McCormick Harvesting Machine (soon to become part of International Harvester) were already operating mills and plants with thousands of workers under one roof and tens of thousands under one corporate umbrella. But the modern role of "employee" -- a person who is entitled to a variety of rights and social benefits in the workplace and in society -- had yet to be invented. Workers were hired, fired, deployed, and paid at the discretion of a foreman. Wage levels rose and fell with market conditions. Heaven help anyone who got sick, had an accident, or lost a job: there was no health or disability insurance, no workers' comp, no unemployment benefits.
It wasn't a situation designed for social peace and productivity. Radical political ideas spread. So did unionism. In any given year from 1900 to 1920 there were anywhere from 1,200 to 4,500 strikes, many of them bloody. A handier form of protest was simply not to show up for work. "Many companies experienced monthly separation rates in excess of 10%," writes historian Sanford M. Jacoby. "Quitting was a form of resistance to the rigors of factory life."
But slowly, over several decades, Employee Nation lurched into existence, shoved along by a combination of enlightened self-interest on the part of employers, union demands, and pathbreaking legislation. Among the key developments:
Stable jobs. In large companies -- Goodyear Tire & Rubber was one of the early adopters -- an organizational innovation known as the Personnel Office began intruding on the foreman's turf. Now it was Personnel that screened job candidates, wrote down job descriptions, fixed pay rates, and meted out discipline. Suddenly, people knew what to expect at work, regardless of who their boss happened to be. Later, unions insisted on the same practices. Now more and more people expected to work for one company for a long time. Job stability was born.
Benefits. The realization was slow in coming, but come it did: companies saw that they could cut down on turnover (and lower the threat of unionization) if they offered what was then known as welfare and would now be called benefits or perks. John H. Patterson, founder of the National Cash Register Co., in 1884, was a pioneer of the new approach. Among many cutting-edge benefits, he constructed "Welfare Hall," which served as both an employee dining room -- short movies were shown at lunchtime -- and a convention hall. And he raised wages and shortened hours. "The more we do for employees," he declared, "the better work they can do."
Income (and other) protection. These days we take it for granted that if you lose a job or retire, you won't immediately be living on savings or charity. But the social safety net is only a few generations old. Unemployment insurance and Social Security, for example, date from the 1930s, the workers' compensation system from 1902. The Wagner Act (1935) legalized labor organizing and established the precursor of today's process for union election and certification. The Occupational Safety and Health Act (1970) created a federal agency responsible for protecting workers.
Of course, you only got those protections if you worked for an organization. The self-employed got no union contracts, no unemployment insurance, no workers' comp. Until 1951 they weren't included in Social Security -- and when they were included, they were expected to pay both the employee's and the employer's share of the payroll tax, a sort of double taxation that persists to this day. Self-employment dropped from 15% of the nonfarm workforce at the end of World War I to less than 10% in 1960, and would continue to decline over the next decade. A 1962 study of self-employment described it as a "shrinking world within a growing economy." By then we were all citizens of Employee Nation.
Today -- after years of hype about the possibility of going out on one's own, after months of a sluggish economy -- it's easy to forget just how amazingly good a deal Employee Nation turned out to be.
Think about it. You land a job with any established company and there's a decent chance you can keep it as long as you want to. (Even in the worst of times, layoffs affect only a tiny minority of the workforce.) You get paid every couple of weeks, regardless of business conditions, plus you face the prospect of a raise, and maybe a bonus, after a year or so. Along with your salary come paid vacations, holidays, health and disability coverage, maybe life insurance, probably a 401(k), and often a host of other perks ranging from club memberships to concierge services.
But it isn't just the compensation; it's also the fact that your company provides you with everything you need to do your work effectively. Tools and equipment -- far better than most people could afford on their own -- plus all the supplies you could use, free of charge. Support staff and technical personnel of all sorts -- a travel department, people to deal with the telephone company and sort the mail and collect the bills, specialists to fix your computer, even an executive assistant if you rank high enough. Many companies have a cafeteria of some sort, often with subsidized meals; a few provide on-site day care or set up plans that allow for payment of dependent-care expenses with pretax dollars. None of this is charity. Businesses want to attract and keep good employees, and above all make it possible for them to focus on their jobs to the exclusion of everything else. The companies that make Fortune's annual "100 Best Companies to Work For" list aren't great places to hang out -- they're great places to work.
"The more we do for employees, the better work they can do."
And it isn't just the workplace; it's the society, which is built around organizations in as many ways as you count. Among them:
Governments have a dozen ways of collecting taxes, from simply sending out bills (the way communities do for property taxes) to taxing business transactions (a sales or value-added tax). In our society the biggest taxes are Social Security and the personal income tax; most people pay both of them through the W-2 payroll deduction. You never see the money going out, and you often see a little bit coming back, in the form of a refund. It's about the least visible and least painful way of paying a tax, and it depends on organizations.
In a similar vein, private businesses have a dozen ways of sizing up potential customers for reliability. In the old days the local banker might know you personally and judge you by your character. A prospective landlord might judge you by your appearance or family size. But in our society banks, auto dealers, credit-card issuers, and other lenders -- not to mention landlords -- typically care a lot about one thing: your pay stub. If you have a job, you're probably OK.
Most developed countries provide health care through some kind of government system. And plenty of other systems are imaginable -- regional or insurance co-ops (as in the Clintons' ill-fated plan), hospital-based coverage, individual policies, whatever. But nearly all Americans under the age of 65 who have health coverage get it from one source: their employers. (The system dates from World War II, when large manufacturers and unions agreed that the companies would pay for health insurance instead of granting an hourly pay increase, which would have run afoul of wartime wage controls.) Get a job with a company that offers health benefits and you automatically qualify.
Now contrast that happy situation with citizenship in Free Agent Nation, which compared with Employee Nation is like an underdeveloped country. In Free Agent Nation, you're on your own, and you have to line up new work while you're trying to finish the current project. In Free Agent Nation, nobody does anything for you unless you pay for it. You send Social Security and income-tax payments to the government yourself, writing those big, painful checks four times a year. You buy your own office furniture, telephone equipment, fax machine, pens, and stamps. You fix your own computer and make your own travel reservations, collect your own receivables and type your own correspondence, and pay for your own vacation time and holidays. Want a loan? Be prepared to show a few years' worth of tax returns and put up more collateral than you would have to if you could produce a pay stub. "Banks don't like to lend to self-employed people," acknowledges Jay Burchfield, chairman of Trust Company of the Ozarks, in Springfield, Mo. "It isn't that they don't want to provide the service; it's just that the failure rate is that much higher. That's why they have those requirements."
And health insurance! If you have a preexisting condition, forget about it. When Congress passed the Health Insurance Portability and Accountability Act (HIPAA), in 1996, it became easier for most employees to "carry" their insurance coverage from one employer to another, regardless of preexisting conditions. But what if you're going out on your own, entering what is known as the nongroup market? HIPAA "pretty much didn't change anything," says Judith Feder, a health-care specialist who is dean of public policy at Georgetown University. In many states if you do qualify, you'll probably pay the highest rate around (or else settle for limited coverage) -- and, of course, you'll pay it all yourself.
Coping with such matters brings on Excedrin headaches numbers one through 100. There's the wasted time and aggravation, which you'll hear about over and over again if you talk with the self-employed. "I had a computer crash. I was on the phone for about six hours with Dell. At the end of that phone call I just started crying" (Trudy Bourgeois, CEO of her own one-person consulting and training firm). There's bad debt. "It's a crapshoot whether I get paid or not. I have about $5,000 owed me -- and they aren't returning my phone calls" (Jodelle Reed, independent broadcast designer). There's the gnawing anxiety of wondering what you'll do when your current project is complete; there's even the chance of being out on the street, much like an employee a century ago who lost his job. "I moved five times after I lost my job, crashing with friends. In New York City, you can't get an apartment without a W-2" (Ian White, freelance graphic designer and aspiring entrepreneur). The sheer psychological comfort of having a regular job with a company, with all its attendant support and benefits, can hardly be underestimated.
But much of it boils down to outright, quantifiable economic cost, which simply means that you have to earn (and collect) one helluva lot more in self-employment than you do in a job just to come out with the same net income. (See "A Tale of Two Designers," below.)
Add it all up -- the psychological, the practical, the economic -- and you see why it takes guts (or naïveté) to go out on your own. You have to want to do it really, really badly. Did we ever truly believe that large numbers of Americans, however good the economic times, would endure such hardships -- when all they had to do to avoid them was to hold down a steady job?
And yet: 100 years ago it would have been a serious mistake to conclude that people could never work peacefully and productively together in organizations. Today it would be a mistake to conclude that a lot more people won't eventually go out on their own.
The problem with Free Agent Nation never lay in its possibilities. With technology, many tasks really can now be accomplished at home as easily as in a conventional workplace. People's attitudes have changed, too. You're part of a two-earner household? How nice it would be to have one of you -- maybe both -- working from a home office, where you could keep an eye on the kids. We Americans dream of going out on our own, and we'd love it if the barriers weren't quite so high. It's just that as all too many people found out in the 1990s, those barriers aren't crumbling on Internet time. To facilitate a real Free Agent Nation we're going to need big, long-term changes: new kinds of organizations, new kinds of businesses, and a different attitude from government.
Suppose, for example, that there were regional or professional associations of all sorts for solo entrepreneurs. The associations could offer health and other insurance coverage, maybe 401(k) plans, tax-escrow accounts (and help with tax preparation), IT professionals on call to help with your computer -- the list could go on and on. You go out on your own, you join up, and there's an existing network of information and support.
Alternatively, suppose some savvy entrepreneur set up a network of free-agent centers in cities around the country as expanded versions of the temporary office suites that are already widely available. There'd be phone answering and tech support. There'd be a database of resources -- accountants, lawyers and financial professionals, and training centers. There might even be administrative personnel to help you sign up for health insurance and collect your bills, and maybe some kind of credit union to provide loans and income verification.
Buying into any such organization or business arrangement would be costly, to be sure. But people who work on their own for a while might welcome a chance to off-load the hassles of independence in return for more time to spend on income-producing work.
As it happens, you can already see such organizations in a kind of embryonic form. There's a nonprofit in New York City, for instance, called Working Today. It's only seven years old, but already some 85,000 independent professionals and small-company and nonprofit employees in the metropolitan area have signed up for benefits through its networks. Working Today offers health, life, and disability insurance, along with a variety of financial services. Then there are businesses such as Boston-based Aquent, once known as MacTemps Inc. (and in that incarnation an Inc 500 company). Aquent "hires" independent professionals in a broad range of fields related to marketing communications and then hooks them up with clients on a project basis. The professional gets nearly all the benefits of regular employment: a W-2, health and dental insurance, a 401(k) with a match, and so on -- yet he or she is never required to take any particular assignment. Aquent handles billing, collections, lining up the next job, and other such hassles.
Are such outfits -- few and far between today -- likely to expand and proliferate? Maybe, but there's a chicken-or-egg problem: they need enough solo entrepreneurs in any given area or profession to make the enterprise viable, but they may not get enough as long as all the barriers are in place. One way around that problem may be legislation analogous to the safety-net legislation that helped stabilize Employee Nation several decades ago. Right now, for instance, national associations can't offer health insurance because they can't handle the widely disparate state regulations that govern the field. Congress could eliminate that problem with a stroke of the pen. A national health-insurance system that guaranteed coverage for all, regardless of where (or whether) people worked, would do still more.
Granted, all this is no more than suggestive. And one thing it suggests is that we're talking decades, not years. But that's exactly the conclusion you have to draw about Free Agent Nation: not that it can't happen someday, or that it won't, only that it hasn't happened yet. How people work is a social construct, the result of a hundred different laws, policies, customs, incentives, and practices. Here in America, things have been organized for decades to give people a big incentive to work for companies. But if we created a new set of institutions designed for free agents, the last barriers to entry might begin to crumble -- and that stubborn self-employment rate might begin to creep upward.
As for the pace of change, well, as Aquent CEO John Chuang puts it, "it's more the tortoise than the hare." We know it was the tortoise who won the race. We just don't know how long the whole thing took.
John Case is a contributor to Inc.
A Tale of Two Designers
|Take two Web designers earning $90,000 a year. Harry, who works for a company, gets his pay every two weeks, minus 7.65% payroll tax, income-tax withholding, and his share of health insurance. But look at what else he might get and (roughly) how much it would be worth annually:|
|25 paid days off -- three weeks' vacation plus holidays||$9,000|
|The employer's share of health insurance, plus dental, disability, workers' compensation, and unemployment coverage, all of it tax free||$6,000|
|Office space and furniture, a high-powered computer, a phone, and a high-speed Internet connection||$5,000|
|A 50% match on 401(k) salary deferrals||$3,000|
|Other assorted perks and benefits||$2,000|
|Total compensation, in cash and benefits||$116,000|
|And then there's self-employed Larry, equally talented and hardworking, recipient of the same gross income (if he can collect it) of $90,000. Here's what he has to pay that Harry doesn't:|
|Employer's share of self-employment tax (at current caps)||($6,000)|
|Health insurance (if he has a family or lives in a high-cost area like New York City, it'll be much more; and he probably won't be able to buy any other coverage, such as disability, at all)||($4,000)|
|A desk, a computer, and phone and Internet service (minimum -- and that's if he works from a home office)||($3,000)|
|Gross income less self-employment expenses listed above||$76,000|
|Compensation difference between Harry and Larry||$40,000|
|Larry will do a little better on his income tax than Harry, because some of his expenses are tax deductible, but it won't be enough to make up the $40,000 difference.|
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