Trends in Gross Domestic Product and Self-Employment of Unincorporated Enterprises in the Canadian Economy, 1987 to 2005

Abstract

This paper investigates the evolution of the unincorporated sector using the number of self-employed and gross domestic product (GDP), in that sector over the period 1987 to 2005. In 2005, there were over 1.5 million self-employed who were unincorporated, generating $93.2 billion of GDP.From 1987 to 1997, the growth of unincorporated GDP averaged 4.7% per year, following a similar trend to that of corporate GDP, at 4.5% per year. From 1997 to 2005, unincorporated GDP grew at a slower rate, averaging 3.8% per year, than that of corporate GDP, which averaged 6.4% per year. The unincorporated self-employed created most of the jobs in the business sector during most of the 1990s, creating 409,400 jobs from 1990 to 1998. However, job creation in the unincorporated sector peaked in 1998, and then declined by 128,400 jobs from 1998 to 2005. GDP shares of unincorporated enterprises showed a substantial structural shift toward service industries. Service industries have grown from 67.8% of GDP in 1987, to 76.5% of unincorporated GDP in 2005. Similarly, the share of total unincorporated self-employment in service industries increased from 63.4% in 1987 to 74.6% in 2005.Self-employment studies have analyzed various characteristics of self-employed workers, including age, sex, immigration status and education, but have generally lacked measures of GDP associated with unincorporated self-employment. This study redresses the lack of economic data, and estimates GDP by industry arising from unincorporated self-employment. This paper updates the 1997 - 2002 estimates of unincorporated GDP derived by Rispoli (2009). The paper also examines how unincorporated self-employment responded to both overall economic trends and business cycles. The rate of unincorporated self-employment was positively correlated to the unemployment rate in the long run. The paper also looks at incorporated self-employment. (Close to one million self-employed were incorporated in 2005). It investigates its relationship to the same macroeconomic conditions to determine if incorporated self-employment has a profile similar to unincorporated self-employment. Previous self-employment studies have typically treated self-employment as a homogeneous group. This paper examines the differences between the two groups and finds that they react differently to macroeconomic conditions. Incorporated self-employment grew substantially between 1987 and 1999 (averaging 3.8% per year), and continued to grow between 2000 and 2005 (averaging 4.1% per year). The evidence suggests that a shift in self-employment did not occur from unincorporated enterprises to corporations, but that different forces were at work in the two sectors. Over the long run, the unincorporated self-employment rate is positively correlated to the unemployment rate. In contrast, the incorporated self-employment rate is not related to changes in the unemployment rate, but is positively correlated to overall GDP growth.