September 2014

Javier Silva: Welcome to the Federal Reserve's Economic Development podcast series. I'm Javier Silva with the Federal Reserve Bank of New York.

Microenterprises provide a significant share of jobs in the country. In fact, research from the Association for Enterprise Opportunity indicates that the 25.5 million microbusinesses in the United States collectively employ 31 million people. But what is the quality of these jobs, and do they create career pathways for employees? The Aspen Institute studied this topic and shares the findings in a new report and interactive website titled Microbusinesses, Gainful Jobs.

We're speaking today with Joyce Klein, director of the Aspen Institute Microenterprise Fund for Innovation, Effectiveness, Learning and Dissemination, otherwise known as FIELD, and Luz Gomez, a consultant for Aspen Institute's Economic Opportunities Program. Welcome, Joyce and Luz.

Joyce, let's begin by having you provide some background for us. How does your report define a microbusiness? Why the impetus for your research, and what was your methodology?

Joyce Klein

Luz Gomez

Joyce Klein: A microbusiness is generally defined as a business with five or fewer employees, including the owner. So they're very small-scale operations. Many of them are sole proprietorships, and they span a wide variety of different kinds of industries and firms. They include catering companies, specialty food companies, small grocery stores, day care providers, landscapers, retail clothing stores, depending on the size of those operations.

And at FIELD, we've been collecting data on the work of microenterprise development organizations for close to 20 years, and our findings reinforce the data that microenterprises create jobs. In fact, [in] a recent study we conducted of more than 1,100 microbusiness owners who received assistance from microenterprise organizations, we found that there are an average of 1.9 paid workers per business, and actually it was 2.9 workers if you include the owner.

Since the Great Recession, there's been an increasing focus and concern with how we create jobs, and more recently I think a lot of conversation, not just about how we create any jobs, but how we create good jobs for people.

To complement the data that we've collected from business owners, we thought we'd go directly to the workers at the businesses themselves and get a better sense of what those jobs were like. We partnered with microlender Accion East to recruit and interview employees of microenterprises that they had worked with in New York and in Miami.

Our team conducted 27 in-depth interviews with these workers, and the interviews helped us to understand in a more qualitative way what workers saw as the benefits and the challenges to working at those very small businesses.

Working with some of our other colleagues at the Aspen Institute, we developed a framework that says that good jobs both raise the floor and they create ladders for people. So we used that framework in our interviews to explore the ways in which jobs at these businesses raise the floor by providing decent wages, benefits, stable schedules, flexibility to accommodate family or other needs, and a sense of fairness and respect.

Then we also tried to explore the extent to which the jobs also built ladders, meaning that they helped workers to gain skills and build relevant work experience.

We also drew in the interviews on some interesting literature that talks about the importance of finding purpose and happiness in the workplace, which are aspects of what psychologists call "gainful employment."

Silva: Luz, many typically think of microbusinesses and small mom-and-pop enterprises with few opportunities for job progression for employees. Is this the case, and what did you find to be the main challenges and opportunities that microenterprises face in terms of providing high-quality jobs to their employees?

Luz Gomez: There were differences in the advancement opportunities, depending on the age of the business. Younger businesses, those that were less than five years old and that seemed poised for growth, offered more opportunities for advancement as the business evolved for this group of workers that we talked to.

But more broadly among the whole group, we did see that working in a small business often doesn't offer the luxury of specialization, especially if it's a very small shop. Employees often have to wear many hats and so as a result, they build a variety of skills in the process. A substantial portion of the younger workers we talked to, those workers that are 20 to 45 years old, they find they're also wanting to start their own business, so this experience was essentially showing them the ropes.

In terms of the main challenges and opportunities that microenterprises face in providing quality jobs, part of the understanding of what constitutes a good job means providing a variety of benefits beyond simply wages. So, when we looked at the literature on challenges for low-income workers, for example, the lack of stable schedules and flexible work arrangements really limits options for workers. They can't go back to school, for example, scheduling day care becomes a real challenge, or they can't maintain other part-time work that would help to supplement wages. This is actually the strongest finding in the group that we spoke to. Workers reported stable and predictable schedules, and work arrangements that were quite flexible.

A challenge for many small as well as large businesses involves offering benefits like paid vacation or sick leave. The sick leave piece is really an issue affecting workers on a national scale. According to the Bureau of Labor Statistics, an estimated 40 million workers don't have paid sick leave, and another study that we looked at noted that one in seven low-wage workers have reported losing a job in the past four years because of getting sick or caring for a child or parent. All the workers that we spoke to had the flexibility to take a sick day without fear of losing their job.

Silva: What did the research show about whether microenterprise program investments are a good use of nonprofit and public money?

Klein: We've been collecting quantitative data on microbusinesses that have been assisted by microenterprise organizations for close to 20 years. We use that quantitative data to calculate the return on investment in microenterprise development. We found there was a little more than a three-to-one return, so that for every dollar invested in supporting the cost of a microenterprise program, there was an estimated return on investment of between $3.20 and $3.40.

We actually used, I think, a pretty conservative estimate of when we tried to look at what the benefits were. What we did when we looked at benefits is we just looked at the changes in what the owner paid him- or herself and any increase in the wages that were paid to workers in the one-year period after the business received assistance.

So that estimate of benefits doesn't include any multiplier effects. It doesn't include any reduction in the receipt of public benefits by the owner or by the workers. It doesn't factor in any benefits that might happen after the first year of business operation, even though we know that pretty high percentages of these businesses survive. There's a set of them that actually continue to add more jobs over time.

Silva: How does this work address any gaps and build on existing research for the field, and who do you anticipate will benefit from this information?

Klein: This research enabled us to collect some qualitative information that provided a deeper and more nuanced picture of the quality of jobs at microenterprises, going deeper than we were able to go with some of the quantitative research that we'd done in the past.

So, with these conversations with microenterprise workers, we were able to say that not only do microenterprises produce jobs, these jobs had qualities that are important attributes of a good job.

Microenterprise practitioners will benefit from this information because it helps to build a case for investing in the type of work that they do in supporting business owners with both capital and training. I also think the framework we present for assessing what makes a job good makes a useful contribution to the broader conversation about what's happening in our labor market. Hopefully, it can be a tool to help funders, policymakers, and others really think more critically about these issues of job quality and what it is we're trying to do with various policies and programs that are trying to stimulate job creation.

Silva: Some economists suggest we have experienced a structural change in the economy, where more workers will experience episodic stints between traditional employers and entrepreneurial endeavors like microbusiness. Just drawing from your research, how do you project the microenterprise field will change over the next decade, and specifically, what are the implications for workforce development?

Klein: There's been a lot of talk lately about structural changes to the economy and what the implications are for the labor force. We're definitely seeing an increase in interest in self-employment and an increase in what folks also call "independent work," among many different segments of the labor market.

Part of the growth we're seeing are people working on their own as contractors or freelancers, and that to some extent is a result of changing corporate practices (corporations wanting to use more contract labor to control their labor costs). But it's also due to the fact that technology's a tool for helping people to access markets to sell goods or sell services that they might be able to provide. That trend within the labor market has a couple of implications for workforce development. First, I think that the work of microenterprise organizations will be more important and we can potentially see a groundswell of volume, as more people seek assistance with starting or operating their business over the next decade.

We're likely to see something that's very similar to what we've historically seen in the microbusiness field. They typically have a set of skills about how to provide a good or how to provide a service, but they lack experience in managing sort of the business side of being an entrepreneur and that's where microenterprise organizations come in.

Another piece of what we're seeing from microenterprise programs is that the demographics are changing, in terms of who's coming to entrepreneurships. More seniors who are looking to supplement Social Security or retirement benefits are engaging in part-time self-employment. I think another implication may be that we need to think about really integrating self-employment into our labor market programs and policies. For example, we might think about incorporating business management related course work into existing career training programs. So they provide some knowledge about the business of, say, managing a catering business.

If you're going to a school to learn culinary skills, you also learn something about how to manage the business side of the catering business, if that may be something that you're interested in. If you're learning graphic design skills, you learn something about what it takes to manage that kind of a business. So maybe not as broad as a whole degree in entrepreneurship, but something that's very specific to that sector or trade that allows you to move back and forth between wage and self-employment.

In addition, because of what we saw in our interviews that small firms can be a good training ground for prospective entrepreneurs, we also might want to look at how microenterprises become more connected to our workforce development system, so that microenterprises can be a home for summer jobs programs or internship programs for youth and younger workers who are interested in thinking about that entrepreneurship option.

The other important labor force issue is that our income and workforce security systems are in large part tied to a labor market model that assumes that most people are employed by larger firms. Think about how retirement benefits, unemployment benefits work, even the Earned Income Tax Credit, which is a key way to supplement incomes for low-wage workers, is much easier for individuals to claim and to get free tax preparation assistance if they are a W-2 worker than if they are self-employed and need to claim self-employment income.

Health care has also historically been a challenge for self-employed entrepreneurs and very small businesses, but hopefully the Affordable Care Act is helping to rectify that. But that's not the only area where we may need to rethink our labor market policies with an eye to the fact that more people may be self-employed in our systems and support should also work well for them.

Silva: Also, what types of economic development policies and programs can best support microbusinesses?

Klein: There are a number of existing policies that have already been really important in growing the field to where it is today: the Community Development Financial Institutions Fund within the Treasury Department, the Community Development Block Grant Program, and the Small Business Administration's Microloan Program. Those are programs that exist that can be used to provide loan capital that microlenders can use, but can also in various ways be used to fund management assistance that are provided by microenterprise organizations, and also support the cost for the lenders in actually deploying that loan capital.

There are programs such as the Women's Business Center Program at the Small Business Administration that have provided important funding support for business and management assistance to microbusinesses. The Community Reinvestment Act has really been critical in stimulating investment from financial institutions—many financial institutions, both national institutions but also smaller local banks. Financial institutions are key sources of loan capital and operating support for microenterprise organizations.

There are a number of efforts under way to look at how to stimulate greater impact investment in the U.S., both among philanthropy but also among socially motivated individual investors. These efforts are looking at policy as one key level and at FIELD, we're really tracking and trying to contribute to those conversations as they relate to investments in organizations that do microbusiness lending, because they can accept investment capital.

Banks typically don't do a lot of microbusiness lending because of the cost. These very small loans aren't profitable in most cases and also many entrepreneurs don't just need capital, they also need management assistance. So there's a need for funding to support both the cost of making the loans, and also providing the management assistance to the entrepreneurs, as well as for loan capital.

Public funding is key there. We've also seen several states create programs to fund microenterprise development organizations. Local communities using funding as well, when I mentioned that the Community Development Block Grant Program is key there. Finally, I think in the future, regulation is also going to be important. We've actually begun to see for-profit capital providers moving into the very small-business-lending space, in many cases fueled by the advances in technology that allow them to reduce costs. The entry of some of these new players can be a great thing if it improves access to folks, as long as the products that they're offering are responsible.

Silva: Thank you for speaking with us today. This concludes our podcast with Joyce Klein and Luz Gomez at Aspen Institute.

The Federal Reserve Banks of Atlanta and Kansas City and Rutgers University will cohost a conference on the Future of Workforce Development at Rutgers campus in New Jersey in October 2014. More information about this conference is available on their websites, and conference proceedings will be posted online after the event.

For more podcasts on this topic and others, please visit the Atlanta Fed's website at If you have comments or questions, please email Thank you for listening.