Study: Opening the Black Box of Self-Employment: Identifying Alternative Work Arrangements in the United States (DOI: 10.1177/00197939251411)
Not all self-employment guarantees financial security, with informal arrangements posing the greatest risks to well-being for many workers.
Using machine learning to classify self-employment, a new University of Michigan study analyzed narrative job descriptions from the 2003-2019 Panel Study of Income Dynamics, a longitudinal dataset with approximately 10,000 U.S. families.
They divided self-employment into three categories: business owners, formal self-employed and informal self-employed, such as gig workers and those performing odd jobs.
The study, published in the journal ILR Review and funded by the National Science Foundation, found large differences in financial outcomes, health and stability among these groups. It also discovered a significant shift in the labor market. Informal self-employment has increased in recent years, while formal self-employment has declined.
Informal self-employed workers make up the largest segment of the self-employed workforce, but fare the worst. They earn less, report poorer physical and mental health, have lower life satisfaction and face a higher risk of unemployment.
The study found that informal self-employment is concentrated among lower-income workers, women, Hispanic people and Black people-patterns shaped by language barriers, discrimination and limited access to opportunities.
"This group is worse off across multiple dimensions," said Joelle Abramowitz, associate research scientist at U-M's Institute for Social Research. "It often lacks benefits, stability and a path to growth. These workers are also far more likely to cycle in and out of unemployment. And it becomes a revolving door-when health falters, people fall out of work, turn to informal jobs to get by, and then slip back into unemployment again."
On the opposite side, business owners earn the highest incomes and report the highest levels of life satisfaction and physical health, the study found. They own more business assets than the other groups. Formal self-employed workers, such as consultants, rank second on all measures.
"If we lump all self-employed people together, we mask critical economic trends and realities," Abramowitz said. "And more: There's a real concern that informal self-employment locks people into work that doesn't pay much and doesn't lead to long-term growth. At the same time, what's striking is how fluid self-employment can be-some people move from informal gigs into more stable or even entrepreneurial roles, and that's something we're actively studying."
Abramowitz and co-author Andrew Joung, a U-M graduate student, recommend policy changes to address the workforce shift, underscoring the need for targeted support.
These include extending unemployment benefits to self-employed workers, increasing access to health insurance and expanding job training and entrepreneurship programs to those in informal work. Support during the transition phase may help more workers move into better opportunities and improve overall economic security.
