The Rise of The 1099 Economy: More Americans Are Becoming Their Own Bosses

While the economy has been miserable for small business, and many larger ones as well, the ranks of the self-employed have been growing. According to research by Economic Modeling Specialists International, the number of people who primarily work on their own has swelled by 1.3 million since 2001 to 10.6 million, a 14% increase.

This rise is partially reflective of hard times, and many of the self-employed earn only modest livings in fields such as childcare and construction. However the shift to self-employment is likely to accelerate in the future, and into higher-paying professions, for reasons including the ubiquity of the Internet, which makes it easier for some types of business to use independent contractors, as well as the reluctance of large firms to hire full-time employees with benefits.

Urban analyst Bill Fulton, who has looked into this issue, concludes we may be seeing a fundamental change in how the economy operates. “Even though there may not be jobs in the conventional sense, there is still work,” Fulton notes. “That’s the whole idea of the 1099 economy. It’s just a different way of organizing the economy.”

If the 1099 economy is the wave of the future, which regions and industries are currently at the forefront? We turned to EMSI for the data. We looked at the change in self-employment numbers for the nation’s 30 largest metropolitan statistical areas from 2001 to the present, and also from 2008, when the economy first nosedived and people started to scramble.

The results of EMSI’s research are fascinating, and somewhat surprising, perhaps giving us a glimpse of where the future of economic growth may be taking shape. The biggest changes have taken place in four metro areas where the number of self-employed workers expanded over 10% growth between 2008 and 2012. Two of them, Houston and Seattle, have done very well in our previous rankings of economic performance, and the other two, Phoenix and Riverside- San Bernardino, Calif., suffered grievously from the housing bubble.

In the case of Houston, its 12% rise in the number of self-employed workers reflects not only widening economic opportunity, but also structural changes in the energy industry, the metro area’s prime economic driver. Since 2005, self-employment in the energy industry has grown 35% (and a remarkable 75% for support activities for oil and gas operations). At least part of this influx, EMSI suggests, could be attributed to land owners cashing in on royalties after leasing their property for drilling, but also to the demand for the increasingly specialized, and often high-tech, services required by that industry.

The entrepreneurial drive in Houston is clearly not a response to economic disaster – the city has a culture that encourages striking out on your own, and low costs and lighter regulation make it easier. Indeed over the past decade, the Texas powerhouse also led the nation in the growth of its 1099 economy, which expanded by a remarkable 51%.

Like the energy industry, the burgeoning high-tech sector also has become more dependent on the 1099 economy. Encompassing people writing apps, doing technical consulting,  and working in the information sector, the numbers have surged over the past five years. This may help explain the double-digit increase in self-employment over the past five years in Seattle (up 10%) and San Jose (up 11%). In some cases this may be young people working on their own; in others it could be older techies who may have lost full-time jobs but are now consulting.

Perhaps the most intriguing shift to the 1099 economy can be found not in hotspots like Silicon Valley, but in areas pummeled in the “housing bust” that are only now showing signs of recovery. This includes two areas, Phoenix and San Bernardino-Riverside, Calif., usually disdained by “creative class” pundits as backwaters, that have seen their number of self-employed grow 12% since 2008.

One contributing factor may be the migration of people to these areas from Southern California, says Rob Lang, a leading expert on economic trends who teaches at the University of Nevada-Las Vegas. For much of the second half of the 20th century, Southern California was, as historian Fred Siegel of the Manhattan Institute aptly put it, the nation’s “capitalist dynamo.” Unlike Houston with energy, or Seattle and San Jose with technology, the Southern California economy was broad based, spanning everything from aerospace and garments to homebuilding  and fast-food restaurants.

Over the past generation, many heirs to this entrepreneurial tradition have decamped to the Sonoran Desert region, which stretches from California into Arizona, Lang says.

Of course, Lang notes, Phoenix has long been disdained by urban aesthetes as environmentally “unsustainable”and doomed to economic decline. Its fate, according to accounts during the worst of the housing crash, was to be surrounded by “zombie sub-divisions” that would remain empty for years, perhaps permanently as the desert encroached.

Yet as the strong self-employment numbers demonstrate, Phoenix may well be on its way to recovery. Brookings recently estimated its rebound since the Great Recession to be the fifth best of the nation’s 100 largest metro areas. Its unemployment rate has dropped from 12% in 2010 to around 7.5% in May 2012. Bankruptcies have fallen dramatically and the housing market is clearly on the mend.

One clear sign of improvement is foreclosures have dropped 53% over the past year and are now below the national average.   Meanwhile net migration into Phoenix as well as the rest of Arizona is once again on the rise.

This recovery, notes local economist Elliot Pollack, follows the typical cycle for Phoenix, led by entrepreneurial activity.  “Greater Phoenix is a small business town,” notes Pollack. ”Historically, during periods of growth, there is substantial new business and self employment formation.”

Phoenix’s self-employment boom suggests that the Valley of the Sun is primed for a comeback. But not all of the top 30 metro areas are seeing anything like this level of new entrepreneurial activity. The 1099 economy has grown at less than half Phoenix’s rate in such “creative”  hotbeds as New York, Los Angeles, San Francisco and Boston. Self-employment is flat in many cities, including St. Louis, Cincinnati and Cleveland, and as actually declined in Kansas City, Chicago and Atlanta.

It may be too early to declare which economies will finally rebound fully from the ravages of the Great Recession. But for my money, I’d look to those places where people are taking the leap to go out on their own as the ones most likely to reinvent themselves when the economy begins expanding robustly again.

Joel Kotkin is executive editor of NewGeography.com and is a distinguished presidential fellow in urban futures at Chapman University, and contributing editor to the City Journal in New York. He is author of The City: A Global History. His newest book is The Next Hundred Million: America in 2050, released in February, 2010.

This piece originally appeared in Forbes.

Self employment photo by BigStockPhoto.com.