Small business formation by unemployed and employed workers

This paper uses data from the Current Population Surveys for 1968–1987 and from the National Longitudinal Survey of Young Men to examine the relationship among unemployment and small business formation and dissolution for white men and women. We find that self-employed workers are more likely to have experienced unemployment than are wage workers because their higher entry rate into self-employment offsets their higher exit rate out of self-employment. Unemployed men and women who enter self-employment experience a larger drop in their earnings than the unemployed who return to wage work.The authors are Vice President, National Economic Research Associates and Associate Professor, Fordham University, respectively. This research was supported by the U.S. Small Business Administration under contract no. SBA-2102-AER-87. We retain responsibility for the views expressed below.     

Racial differences in self-employment exits

Using detailed work history data in the 1979 National Longitudinal Survey of Youth, I investigate the reasons behind the racial gap in self-employment. My analysis of an “age uniform” sample of men, all of whom are observed from age 22 to 40 years, reveals that racial differences in cross-sectional self-employment rates are largely due to the fact that minority workers’ self-employment spells are relatively short-lived. Moreover, I find that minority workers’ relatively high exit rates are driven primarily by transitions to nonemployment. Estimates from a multinomial logit model of self-employment exits suggest that minority workers’ weak attachment to the labor market prior to entering self-employment is an important determinant of their transition from self-employment to nonemployment, while lack of prior industry and self-employment experience contributes to minorities’ transitions to wage employment. When I assign blacks and Hispanics the same (mean) work histories as whites, the predicted black–white gap in the first-year self-employment survival rate decreases by 31% and the Hispanic–white gap decreases by 14%.     

Only the lonely? The influence of the spouse on the transition to self-employment

Previous research showed that married individuals are overrepresented among the self-employed. Few studies proposed skill-spillover between the spouses within the marriage as an explanation. This paper deviates from the previous research by exploring different relationship contexts (e.g., cohabitation, being married or divorced, a widow(er) or single) and the role of partner influences under these contexts. It argues that the interaction between gender and relationship status implies variation in not only resources but also constraints, and hence sorts individuals into two different types of self-employment: entrepreneurial self-employment (i.e., incorporated business) and unincorporated self-employment. Using “Panel Study of Income Dynamics (PSID) 1965–2005” data, results of the competing risk models show that marital status contributes to both types of self-employment transitions, especially for men, but also for women. Cohabitation is a less supportive context for entrepreneurship and a partner’s self-employment experience increases only women’s likelihood of entering into entrepreneurship. These results suggest that skill-spillover between partners might be context dependent and only in one direction (from men to women).     

The Determinants of Latent Entrepreneurship in Japan

This paper examines regional characteristics affecting the latent entrepreneurship in Japan, focusing on regional macroeconomic indicators, existing density of establishments and human capital, and business start-up assistance programs by local governments. We define two types of people having the latent entrepreneurship as follows (1) persons merely wishing to be a self-employed worker, and (2) persons preparing to be a self-employed worker out of the former definition. Total cash earnings and the unemployment rate, which are the macro economic indicators, had positive effects on latent entrepreneurship in Japan. Judging from the significance of their estimations, the latent entrepreneurship is explained by the “Push hypothesis”. If we examine the problem more closely, it is necessary for us to identify government assistance programs which make the latent entrepreneurs more self-employment.     

Push and pull factors and Hispanic self-employment in the USA

This study examines the main push and pull factors driving Hispanic self-employment in the USA by modeling the self-employment decision as a function of sectoral earnings differences, country of origin, and other factors. Findings indicate that a main reason Hispanics engage in self-employment is they can earn more working for themselves than in wage/salary work. Immigrants appear to be pushed into self-employment as a result of limited opportunities in the wage work sector. Although low relative earnings in wage/salary work could push workers with limited English proficiency into self-employment, our findings indicate barriers to this. Results suggest that workers pulled into self-employment are those with more work experience and a college degree. Workers who originate from Southern South America and Colombia have relatively high self-employment rates, while Mexico-origin workers have relatively low self-employment rates. We also uncover differences across Hispanic origin groups in terms of the influence of gender, education, and personal wealth on self-employment participation.     

Is self-employment really a bad experience? : The effects of previous self-employment on subsequent wage-employment wages

We use propensity score matching methods to quantify the effects of past self-employment experience on subsequent earnings in dependent employment using data on the population of Danish men observed between 1990 and 1996. Our results generally confirm existing studies in that we find that a spell of self-employment is associated with lower hourly wages compared to workers who were consecutively wage-employed. We also show, however, that this effect disappears—and even becomes positive in some settings—for formerly self-employed who find dependent employment in the same sector as their self-employment sector. Hence, the on average negative effect of self-employment is rather caused by sector switching than by the self-employment experience per se. Moreover, formerly self-employed who either enjoyed a high income or hired at least one worker during their self-employment spell receive wages in subsequent dependent employment that are at least as high as for individuals who have been consecutively wage-employed.     

The best and the brightest or the least successful? Self-employment entry among male wage-earners in Sweden

This paper analyzes self-employment entry among Swedish-born male wage-earners. Is it the best and the brightest or the least successful that become self-employed? The residual from an income regression is used as an indicator of who belongs to which group. We find that both wage-earners who receive a lower income than predicted, i.e. have a negative residual, and those who receive a higher income than predicted, i.e. have a positive residual, are more likely to become self-employed than those who receive an income close to the predicted one. However, splitting self-employment into different types depending on corporate form and number of employees, we find that the self-employed are drawn from both tails of the residual distribution only if it is a matter of unincorporated firms. Wage-earners who become self-employed and start an incorporated firm are only drawn from the top of the residual distribution. Using self-employment income and turnover as measures of self-employment performance, we find a positive linear relationship between the income residual and performance.     

The Entry and Exit Dynamics of Self-Employment in Canada

This paper documents the extent and cyclicality of self-employment entry and exit flows; explores transitions to and from self-employment; and investigates the influence of individual characteristics and labor market experience as well as macroeconomic conditions on the probability of moving into or out of self-employment.The self-employed sector now employs over two and a half million Canadian workers, has expanded on average by over 4% in the 1990s and accounted for over three out of every four new jobs the economy has created. There are substantial flows both into and out of self-employment over the last 15 years. Gross flows into and out of self-employment averaged nearly half a million per year between 1982 and 1994, amounting to 42% of the total self-employed population.Regression results reveal no statistical evidence supporting the dominance of the push hypothesis over the pull hypothesis – the notion that people are increasingly pushed into self-employment by deteriorating economic conditions. This analysis is done both through time-series analysis and the analysis of the determinants of flows into (and out of) self-employment. As in paid employment, younger Canadians are subject to higher turnover in self-employment – they are not only more likely to enter but also substantially more likely to leave self-employment. Prior paid-employment experience and prior self-employment experience are both found to be associated with a higher likelihood of entering self-employment. The longer one is self-employed, the less likely he/she is going to leave the business. Having a spouse in business (being self-employed) substantially increases the likelihood of the other spouse becoming self-employed – a self-employed spouse often attracts the other to either join the family business or start their own. We also find evidence that steady family income through paid-employment from one spouse increases the self-employed's (the other spouse's) affordability to continue with the business venture and hence reduces the likelihood of leaving self-employment.     

The effect of education and experience on self-employment success

The impact of education on the business success of an entrepreneur has been the subject of much discussion and speculation in both the popular and academic press. The literature is full of folklore focusing on the high-school drop out who made it big in the business world armed with an education from the school of hard knocks. Until recently this was part of the myth surrounding entrepreneurship. The myth takes shape in three basic areas. The first looks at the entrepreneur's level of education relative to the general public. The second area addresses the effect of education on people becoming entrepreneurs on a macro level. Do people with higher levels of education start more businesses than people with less education, does it increase the probability of becoming an entrepreneur? The third area concerns the micro-economic effect on individual entrepreneurs. Does education help an entrepreneur succeed?Past research on education and entrepreneurship consists mostly of institutional studies at universities with established programs. These offer good support for the outcome of educational programs. However, these studies are poorly circulated and seldom published because of the limited sample sizes (McMullan (1988) summarized several such studies). In this study the literature is reviewed in three areas mentioned above and new information on the relationships between education, experience, and self-employment is provided.The empirical part of this study examines the effect of education and experience using U.S. census data. Self-employment is used as a surrogate for entrepreneurship and the analysis controlled for farmers and professionals (medical doctors, lawyers, accountants, etc.) so that it would more closely fit our conception of an entrepreneur. Earnings potential was used as a measure of success. We recognize that success is a subjective experience based on one's expectations and actual outcomes; however, we believe that earnings provided a global indicator of success that is quantifiable relative to the sample used. Four specific hypotheses were generated and tested using the data.The first hypothesis (Self-employed have more years of formal education than those who do not work for themselves.) was confirmed with the years of education for the self-employed being 14.57 years for all workers, 14.71 years for males, and 14.13 years for female workers. Wage and salaried workers came in nearly one full year lower with: 13.58 years for all worked, 13.73 for male workers, and 13.40 for female workers.Hypothesis two (The number of years of formal education will increase the probability of becoming self-employed.) was supported with the probability of becoming self employed increasing by 0.8% for each year of education providing a significant relationship (t = 32.11 for all workers, t = 21.95 for males, and t = 20.76 for females, p < .0001 for all three).Hypothesis three (The relationship between years of formal education and success of the self-employed, as well as the general population will be positive and significant.) was supported using the “Beta” coefficients in a “Probit” regression model, indicating that self-employment and wage and salaried earnings increase significantly for each year of education. Self-employment earnings increased $1207.63 a year for each year of education ($1212.76 for males and $414.81 for females). Wage and salaried workers earnings increased $825.99a year for each year of education ($1023.33 for males and $369.37 for females).Hypothesis four (The relationship between experience and self-employment success will be positive and significant, but weaker than the impact of education.) was supported. All self-employed workers, both male and female, had over two years more experience than their wage and salaried counterparts. There is a strong positive relationship between self-employment and both experience and earnings with the exception of self-employed females whose experience did not significantly impact their earnings.In conclusion, a general education has a strong positive influence on entrepreneurship in terms of becoming self-employed and success. Experience has a similar relationship although not as strong. Future studies need to examine the impact of specific types of education, such as business school or entrepreneurship classes, on the entrepreneurial outcomes in the studies.     

Public health insurance,individual health,and entry into self-employment

We investigate the impact of a differential treatment of paid employees versus self-employed workers in a public health insurance system on the entry rate into self-employment. Health insurance systems that distinguish between the two sectors of employment create incentives or disincentives to start a business for different individuals. We estimate a discrete time hazard rate model of entry into self-employment based on representative household panel data for Germany, which include individual health information. The results indicate that an increase in the health insurance cost differential between self-employed workers and paid employees by €10 per month decreases the probability of entry into self-employment by 1.7% of the annual entry rate. This shows that entrepreneurship lock, which an emerging literature describes for the system of employer-provided health insurance in the USA, can also occur in a public health insurance system. Therefore, entrepreneurial activity should be taken into account when discussing potential health-care reforms.     

A longitudinal analysis of the young self-employed in Australia and the United States

This paper examines the pattern of self-employment in Australia and the United States. We particularly focus on the movement of young people in and out of self-employment using comparable longitudinal data from the two countries. We find that the forces that influence whether a person becomes self-employed are broadly similar: in both countries skilled manual workers, males and older workers were particularly likely to move to self-employment. We also find that previous firm size, previous union status and previous earnings are important determinants of transitions to self-employment. The main difference we observe is that additional years of schooling had a positive impact on the probability of being self-employed in the US but were not a significant influence in Australia. However, the factors influencing the probability of leaving self-employment are different across the two countries.     

What a Difference a Y makes-Female and Male Nascent Entrepreneurs in Germany

In western industrialized countries men are on average more than twice as active in entrepreneurship as women. Based on data from a recent representative survey of the adult population in Germany this paper uses an empirical model for the decision to become self-employed to test for differences between women and men in the ceteris paribus impact of several characteristics and attitudes, taking the rare events nature of becoming an entrepreneur into account. Furthermore, a non-parametric approach using Mahalanobis- distance matching of man and woman which are as similar as possible in all characteristics and attitudes but the “small difference” is used to investigate the difference in the propensity to become self-employed by sex. A core finding is that the difference between men and women in both the extent and the effect of considering fear of failure to be a reason not to start one’s own business is important for the explanation of the gap in entrepreneurship by sex.     

Patterns of ethnic self-employment in time and space: evidence from British Census microdata

The over-representation of certain ethnic minority and immigrant groups in self-employment is, in common with other developed countries, a notable feature of the UK labour market. Compared to the substantial growth in self-employment in the 1980s, the 1990s saw overall self-employment rates plateau. Despite this, some minority groups experienced continued growth whilst others, particularly Chinese and Indian males and Pakistani, Bangladeshi and Chinese females, saw their self-employment rates decline. In this paper we use microdata samples from the 1991 and 2001 Censuses to investigate the dynamic and spatial patterns of ethnic entrepreneurship. Using decomposition methods we find that, for males from the Asian groups, changes in observable characteristics associated with an increasing proportion of second-generation individuals explain much of the decline in self-employment. This, which is also true of Chinese females, reflects in part the age structure and educational experiences of the second generation. The dynamics of Black male and Pakistani/Bangladeshi male and female entrepreneurship are less easy to explain. We also find that, while there is no evidence of self-employment being an “enclave” phenomenon, local economic conditions do affect rates of entrepreneurship for some groups, notably Pakistanis and Bangladeshis.     

Intergenerational transmissions in immigrant self-employment: Evidence from three generations

This paper presents the first study of intergenerational transmissions in immigrant self-employment across three generations. Based on a Swedish data set, the results show that having a self-employed father, as well as having a self-employed grandfather, has a positive effect on self-employment propensities for male third-generation immigrants. For native Swedes having a self-employed father is of importance for self-employment propensities, while having a self-employed grandfather is not. Evidently, there appears to be a generational link in self-employment across three generations for immigrants, but not for natives. Since immigrants transfer general self-employment abilities, third-generation immigrants with self-employed ancestors are over-represented in self-employment. Many of them, however, are not necessarily in the same business line as their fathers. In contrast, when natives transfer general self-employment abilities, their offspring tend to become self-employed in the same business line as their fathers.     

Residential segregation influences on the likelihood of black and white self-employment

This paper estimates a model of potential to enter self-employment based on individual, household and community-level factors. This paper focuses on the impact of segregation on the likelihood of black and white working-age adults to be self-employed workers rather than wage or salary workers. A multi-level analysis combined answers of over 400,000 respondents to the 1990 and 2000 Integrated Public Use Micro Sample (IPUMS) [Ruggles, S., Sobek, M., Alexander, T., Fitch, C., Goeken, R., Hall, P., King, M., Ronnander, C., 2004. Integrated Public Use Microdata Series: Version 3.0 [Machine-readable database]. Minnesota Population Center [producer and distributor], Minneapolis, MN] with structural measures from 327 metropolitan areas from the U.S. Census Bureau's Housing Patterns files [Iceland, J., Weinberg, D., Steinmetz, E., 2002. Racial and ethnic residential segregation in the United States, 1980–2000. Special Report Series, CENSR no.3, U.S. Census Bureau, Washington, DC] to test the influence of each segregation process. The two residential segregation processes (relative clustering and exposure) were found to limit and enhance potential entry into self-employment, but in unique ways for each group.     

Self-Employment Status: The Role of State Dependence and Initial Circumstances

This paper uses British longitudinal data to model self-employment status. In contrast to previous studies, the modelling approach accounts for state-dependence and unexplained heterogeneity effects. The paper concludes that state dependence is an important influence on self-employment choice. Someone self-employed last year is, controlling for observable and unobservable influences, 30 percentage points more likely to be self-employed this year than someone who was in paid employment a year ago. We also find significant individual heterogeneity in the probability of self-employment, with significant explained influences operating through gender, educational attainment, occupation, spouse's self-employment, and parental and educational background. Significant, though quantitatively smaller influences come though initial financial circumstance and current house price movements. Local labour market shocks do not appear significantly to influence self-employment choice. This we conclude that the autoregressive nature of self-employment time-series would appear to be a structural rather than a cyclical phenomenon.     

Intergenerational correlation in self employment: some further evidence from French ECHP data

Previous empirical work has shown that self-employment is correlated across generations, so that the children of the self-employed are themselves more likely to be self-employed. However, the reason for this intergenerational correlation remains unclear. This paper contributes to the existing literature in two ways. First, using French data from the European Community Household Panel Survey, we provide a further examination of this intergenerational correlation among the self-employed. In particular we investigate to what extent the intergenerational correlation in self-employment reflects occupational following. The second contribution of our paper is to investigate the differences between first- and second-generation self-employed workers and their possible explanations. Even though our results indicate that having self-employed parents increases the probability of being self-employed, irrespective of occupation, we do observe that a large majority of individuals enter the same (or very similar) occupation as their parents, which is consistent with occupational following. Our results also reveal some differences between the first- and second-generation self-employed. Formal education is more important for the first-generation self-employed (those whose parents are not self-employed) than for the second-generation self-employed. Further, the first-generation self-employed, who received less informal human capital than the second-generation self-employed, compensate for this shortcoming by acquiring more formal education.

Start-up incentives: Entrepreneurship policy or active labour market programme?

As several European governments develop new start-up programmes during recessions, the appropriateness of these policies recently has become a hot policy issue. This study suggests that the contribution of these incentives is dubious, if aimed to combat economic and jobs crises as part of the entrepreneurship policy, and can be shaped by various country-specific factors, such as the economic situation and the stringency of labour laws. To provide support for these claims, this paper investigates the underlying determinants of an individual's decision to switch from unemployment to self-employment in Europe and stresses the need to devote special attention to the role of three essential dimensions: (i) the existing heterogeneity within self-employment, by considering self-employed individuals who hire employees (employers) and self-employed individuals without personnel (own-account workers) as separated groups; (ii) the effects of different measures of social capital and network contacts, as forms of micro level institutional factors; and (iii) the explanatory power of cross-country differences in the state of the economy, expenditure on start-up incentives, and the stringency of labour laws, as forms of macro level institutional factors. This study has useful theory and policy implications for entrepreneurship development.     

Self-employment of older Americans: do recessions matter?

As high unemployment rates linger following the latest recession, job opportunities can be sparse, especially for older workers. This might prompt older Americans to seek out opportunities in self-employment. Alternatively, recession-related decreases in economic activity might make self-employment less attractive. Using the Health and Retirement Study, we find that unemployed respondents are more likely to enter self-employment and that these decisions are clearly affected by recessions, although the effects differ by recession and gender. Unlike men, women’s self-employment decisions are very sensitive to other sources of household income, and women are less likely to become self-employed the deeper the recession.     

The Making of Entrepreneurs in Germany: Are Native Men and Immigrants Alike?

This paper uses a state of the art three-stage estimation technique to identify the determinants of the self-employed immigrant and native men in Germany. Their making is surprisingly alike. Employing data from the German Socioeconomic Panel 2000 (GSOEP) release we find that self-employment is not significantly affected by exposure to Germany or by human capital. But this choice has a very strong intergenerational link and it is also related to homeownership and financial worries. While individuals are strongly pulled into self-employment if it offers higher earnings, immigrants are additionally pushed into self-employment when they feel discriminated. Married immigrants are more likely to go into self-employment, but less likely when they have young children. Immigrants with foreign passports living in ethnic households are more likely self-employed than native Germans. The earnings of self-employed men increase with exposure to Germany, hours worked and occupational prestige; they decrease with high regional unemployment to vacancies ratios. Everything else equal, the earnings of self-employed Germans are not much different from the earnings of the self-employed immigrants, including those who have become German citizens. However, immigrants suffer a strong earnings penalty if they feel discriminated against while they receive a premium if they are German educated.