Many people put off starting a business because they fear they’ll lose financial security. That may have been true in the past, but new research suggests the financial situation of the average self-employed worker is now just as stable as for their corporate peers, with the notable exceptions of low-wage freelancers and those forced into self-employment.
Just-released data from MBO Partners, a provider of back-office services to independent workers that studies the freelance economy, has found that the financial wellbeing score of the self-employed is about the same as traditional workers. The data was gathered for the giant 2019 MBO Partners State of Independence Study.
One reason self-employed professionals are doing so well is the growth of platforms that enable them to find work more easily than in the past, says Gene Zaino, executive chairman and founder of MBO Partners in Herdon, Va., which in July brought on new CEO Miles Everson, former global advisory and consulting CEO of PwC.
“The other aspect is people are seeing this as a career move and looking at the marketplace and applying their skills have multiple clients and really build a business,” says Zaino.
Beyond that, many big companies are more open to using freelance workers, such as consultants, than in the past, opening the spigot of high-paying work. “The market is pretty efficient,” says Zaino. “Companies will use independent workers because of the flexibility they offer, and independent workers choose to work independently because of the control and flexibility they get.”
People who are consciously choosing freelance work and not being forced into it by a job loss or other circumstances are doing “really well,” says Zaino.
The results mirror 2017 research by the Consumer Financial Protection Bureau (CFPB) that found that the average financial wellbeing score for traditional workers and independent workers was the same.
Average independent worker report financial stability
Both studies the CFPB’s metrics to measure financial wellbeing, scoring survey respondents from one to 100.
Here is what the scores mean:
40 or less: Significant financial insecurity
42-52: Struggling to make ends meet, but more secure than those scoring 40 or less
51-60: Financial stability
Over 60: Financial security
In MBO Partners’ research, the average score for independent workers was 54. For those in traditional jobs, it was 53. In the CFPB study, both groups’ average score was 54.
Factors such as stagnating wages, the decline of middle-class jobs, and workers’ continuing economic insecurity are causing more people to try occasional and part-time independent work, MBO Partners noted.
The role of mindset
Interestingly, “reluctant independents”—those forced into self-employment by factors such as a layoff but who would prefer a traditional job—had an average wellbeing score of 48, in MBO Partners’ research. Among these involuntary freelancers, 22% had scores of 40 or less, meaning they are experiencing significant financial insecurity.
Some of this may reflect their mindset. Reluctant independents reported less tolerance for risk than the average independent worker.
“They are struggling,” says Zaino. “They are reluctant because they don’t want to be doing this kind of work. They want a job. Apparently, they can’t find a part-time or full-time job. It’s either that or they have a full-time job and are reluctantly doing this work because they have to make ends meet. Their wages are too low.”
MBO Partners found that 41.1 million adults are working independently as consultants, contractors, freelancers, and temporary or on-call workers in 2019 in its survey. The survey was conducted by Emergent Research and Rockbridge Associates, which polled 3,985 U.S. residents ages 21 and older, in a sample weighted to reflect U.S. demographics.
Making ends meet
The MBO Partners survey also asked workers to describe how they are managing financially today. The results were similar for traditional and independent workers:
Living comfortably: 30% of independent workers versus 29% of traditional job holders
Doing okay: 47% of independent workers versus 49% of traditional job holders
Just getting by: 15% of independent workers versus 17% of traditional job holders
Finding it difficult to get by: 8% of independent workers versus 5% of traditional workers.
Freelancers’ economic security varies significantly by income
There is a wider range of income levels among the self-employed than among workers in traditional jobs, with a greater percentage of independent workers on the high end and low end of the pay scale, MBO Partners found. The percentage of independent workers earning more than $100,000—or $25,000 or less—is higher than for those in traditional jobs.
With income correlated to economic security, there was also more variation in economic wellbeing scores.
MBO Partners found:
· 27% of independent workers reported economic wellbeing scores of 50+ versus 22% of traditional job holders
· 16% of independent workers reported economic wellbeing scores of 40 or less versus 13% of traditional jobholders.
“There’s a barbell shape,” says Zaino. “There are people on the high end doing extremely well.” However, those on the lower end of the pay scale who are doing routine work such as driving for rideshare services have a much more challenging financial situation, he has found.
Among traditional workers, economic security doesn’t always correlate to high income. Great benefits make a difference, if workers can get them.
The CFPB recently found that military members reported greater economic security than the average American, with those on active duty reporting an averages score of 61, and those in the reserves showing an average score of 60. The CFPB linked this to (1) stable month-to-month wages, (2) employer-provided health benefits and (3) retirement savings benefits that come with military work, which for some include pensions.
Many people used to enjoy these three things in traditional private-sector jobs. However, with W2 workers paying more for healthcare out of pocket and pensions declining—without increases in pay to compensate—the situation of W2 workers is getting closer to that of the self-employed, who have to pay for benefits if they don’t have access through a spouse.
Their situations may get even closer. Zaino believes it may soon be easier for the self-employed to buy benefits. “Insurance companies that have traditionally been set up to aggregate their benefits program through a large employer are now finding that this is a big market,” says Zaino. “They will need to find a way to fractionalize their offerings so insurance can be sold individually. Insurance sold under the Affordable Care Act is still very expensive. I think we’re going to see changes there. We have to.