Business Estimates from the Office of Advocacy:

A Discussion of Methodology

An Office of Advocacy Working Paper.

By Brian Headd, U.S. Small Business Administration, Office of Advocacy

June 2005. [16] pages.

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of working papers issued by the U.S. Small

Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do not necessarily reflect

official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of Advocacy at 409 Third

Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Although many measures of the number of firms are

available, adding employers and nonemployers from

U.S. Department of Commerce, Bureau of the

Census data sources is the best and most complete.

However, this number is only available with a lag

time of about two and a half years. The Office of

Advocacy estimates more current figures and offers

this paper to make the methodology transparent and

to generate discussion.

Overall Findings

Estimates from the Office of Advocacy are close to

the actual numbers and would be quite adequate for

many practical purposes. But slight variations in the

rates of change in the number of employers and nonemployers makes creating an estimate that follows

the trend of the annual change in employers and nonemployers quite difficult. Therefore, using these estimates for academic models could present problems.

As more data become available over the years, the

methods presented here will need to be reevaluated.

Highlights

• The small number of years for which data are

available restricts the ability to evaluate the estimates. So charts are employed and attached to the

end of the working paper so readers can better evaluate the estimation methodology.

• The actual number of employers and nonemployers continually reflect slight annual increases, as

there were actual increases in all of the periods

reviewed. The increases ranged from 1.7 percent to

3.9 percent for nonemployers and from 0.1 percent

to 2.0 percent for employers.

• The estimates were quite close to the actual figures, which was most likely the result of the limited

natural variation of the figures from year to year. But

nonemployer estimates were consistently lower than

actual figures. The percentage increases in nonemployers over the measurable period of 1997 to 2002

were larger than the percentage increases in the number of nonfarm sole proprietor tax returns, so the

estimation method resulted in a low estimate of the

number of nonemployers. Because nonemployers

constitute most—75 percent—of all businesses and

because nonemployer estimates tended to be lower

than nonemployer actuals, total business estimates

were slightly lower than total business actuals.

• The results do not show a consistent improvement from an estimate made two years in the future

to one year in the future. So having one additional

year of data did not yield figures that were better

able to capture the change in the numbers of employers and nonemployers.

• With nonemployers and employers continually

rising throughout the evaluation period, an opportunity to evaluate the estimates’ success at capturing

changes of direction was not available. The decline

in the number of employers estimated for 2001 did

not materialize.

Data Sources and Methodology

Annual nonemployer data are available only since

1997; employer data are available since 1988. An

econometric model created from these few available

June 2005 No. 258
data points would be weak at best; therefore

Advocacy’s more basic approach uses current available data from the Internal Revenue Service (IRS)

and the Employment and Training Administration

(ETA) to estimate year-to-year percentage changes.

In addition, this basic approach injects transparency

into the process.

The Census Bureau’s nonemployers are similar to

the population of sole proprietors documented by the

IRS. The percentage change rate from IRS sole proprietors is applied to the most current Census nonemployer data.

The Census Bureau’s employers from the

Statistics of U.S. Business (SUSB) program are similar to the employer population covered in state

unemployment insurance data provided to the ETA.

To arrive at figures for employer businesses, ETA’s

year-to-year percentage changes in employer births

and terminations are applied to SUSB’s figures for

employer firm births and closures. The net of these

estimates is applied to SUSB’s employer figures.

This report was peer reviewed consistent with the

Office of Advocacy’s data quality guidelines. More

information on this process can be obtained by contacting the director of economic research at advocacy@sba.gov or (202) 205-6533.

For More Information

The complete text of this study is available on the

Office of Advocacy website at

www.sba.gov/advo/research/wkpapers.html.

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