Where Does Entrepreneurship Pay?

Abstract

Empirical literature has found negative earnings differential between self-employed and paid workers, but much of the existing theory predicts the opposite, especially when entrepreneurship is defined as applying general technical knowledge to firm-specific purposes. We employ the NSF data on science and engineering workforce to identify occupations and jobs that require especially intensive use of technical knowledge acquired through formal education and we show that entrepreneurship generates considerable conditional mean and median pecuniary returns as compared to paid work in such jobs. In contrast, among scientists and engineers whose business ventures are not related to their education, the entrepreneurial earnings differential is negative, in line with findings in the previous literature. The positive earnings differential in education-intensive occupations increases with tenure in business, but declines with age. We offer a simple job-matching model where workers receive noisy signals about their ability, and higher-ability workers gradually sort themselves into self-employment in education-related jobs because of higher returns to ability in such jobs. The model is shown to be in line with evidence from panel data, suggesting that the premium to self-employment in education-intensive occupations and jobs might be due primarily to selection.

Keywords: entrepreneurship, earnings differential, education, science and engineering

JEL Classification: M13, J31