What Is the Private Sector?

The Private Sector Explained in Less Than 5 Minutes

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If you work for a business whose goal is to earn a profit, you work in the private sector. The private sector is the part of the economy owned and controlled by individuals and businesses rather than the government. Unlike the public sector, which is funded primarily through tax dollars, the private sector generates revenue from selling goods and services.

Learn how the private sector functions in the U.S. economy, the basic differences between the private and public sectors, and why each one matters to you.

Definition and Examples of the Private Sector

The private sector is the economic segment controlled by private individuals and businesses rather than the government. A private-sector business sells products or services to customers with the goal of earning a profit. The owners typically earn income from the business, and they may also pass part of the profits on to shareholders and investors. Most people employed in the U.S. work in the private sector.

While most of the private sector consists of for-profit businesses, the U.S. Bureau of Labor Statistics classifies jobs in nonprofit organizations as part of the private sector.

Generally speaking, the private sector is made up of privately and publicly owned businesses. Giant corporations such as Walmart, McDonald’s, and Apple are all examples of publicly owned, private-sector businesses. One of their sources of funding is issuing stocks that are bought on a public stock exchange by investors; this makes them publicly owned.

Smaller businesses, like your neighborhood barbershop or self-employed people, are privately owned private-sector businesses. They do not issue stocks to investors, so they remain privately owned.

Small businesses are the most commonly owned type in the U.S. Some structures used by these businesses include corporations, cooperatives, trusts, partnerships, and sole proprietorships.

How the Private Sector Works

When someone wants to start a private-sector business in the U.S., they generally have three options: self-funding, finding investors, or obtaining business loans. As a company grows, it may choose to finance its growth by making an initial public offering (IPO). That means the company issues stock that becomes available for the general public to buy and sell on stock exchanges.

Privately owned businesses that don’t issue public stocks tend to be smaller, often family-owned or owned by a small group of people.

The U.S. Securities and Exchange Commission (SEC) requires publicly traded companies to submit extensive information about financial performance, including annual and quarterly statements. Privately held companies, however, aren’t subject to these reporting requirements.

Private Sector vs. Public Sector

Private Sector Public Sector
Includes large corporations, small businesses, self-employed people, and independent contractors Includes the military and federal, state, and local government agencies
Purpose is to generate a profit Purpose is to serve the public
Revenues are generated through the sale of goods and services Revenues are generated by levying taxes

While individuals and businesses control the private sector, the government controls the public sector and is funded with tax dollars. The public sector includes the military and federal government agencies including the Internal Revenue Service (IRS), Food and Drug Administration (FDA), and Environmental Protection Agency. State and local governments are also part of the public sector. Common public-sector jobs include police, firefighters, teachers, and inspectors.

In free-market capitalist societies, the private sector tends to occupy a much larger role than the public sector. According to the Brookings Institute, in 2020, the public sector made up about 15% of the workforce in the U.S., while the public sector in Russia employed close to 40% of the workforce.

The private and public sectors frequently intersect. While individuals and businesses control the private sector, they typically need licenses and permits from government agencies to operate. The public sector also regulates businesses and provides the infrastructure, such as highways and bridges, that businesses need to operate.

One of the key differences between the private and public sectors is how each is funded.

Traditionally, working in the public sector has been viewed as more stable than private-sector employment. Employee tenure tends to be shorter in the private sector compared to the public sector. In 2020, public-sector employees had an average tenure of more than six years, nearly double that of public-sector employees, whose average tenure was more than three years. Public-sector workers also participated in unions at about five times the rate of private-sector workers in 2020.

Comparing compensation between the sectors is difficult because of the types of jobs available in each sector. For example, manufacturing and sales make up a significant portion of private-sector activity. However, these roles are rare in the public sector. About two-thirds of state and local government employees work in administrative support and professional occupations, including teachers. In the private sector in 2020, these roles accounted only for about half of the jobs.

In a 20-year study of wages, the National Institute on Retirement Security found that state and local government workers earned about 11% to 12% less than their private-sector counterparts, although the public-sector workers had slightly more benefits. A Congressional Budget Office (CBO) report found that between 2011 and 2015, federal workers with lower levels of education earned more than private-industry workers in similar positions. However, federal workers with a doctoral or professional degree earned 34% less than their public-sector counterparts.

Key Takeaways

  • The private sector is the economic segment that consists of for-profit businesses that sell goods or services.
  • Most of the private sector in the U.S. consists of privately owned businesses, but some businesses issue stock to investors, which make them publicly owned companies.
  • Private-sector employees typically earn higher wages than their public-sector counterparts. However, they typically have less job security and shorter tenure.