Entrepreneurship isn’t usually worth the risk, some research says, at least strictly in financial terms. Thankfully, plenty of people take the plunge anyway, because they’re drawn to it for other reasons, such as wanting to be their own boss, or wanting to pursue a personal passion.
But that conventional view is misleading, argues a recent paper by Gustavo Manso at the University of California, Berkeley. Instead, he finds that self-employment does pay off financially, but not in the way entrepreneurs might expect. The financial benefit doesn’t usually come from the entrepreneurship itself, but in the form of higher wages when the entrepreneur returns to the workforce.
Research in this area typically compares salaried workers to those working for themselves; the latter group tends to make less, on average, after controlling for factors like level of education, hence the finding that entrepreneurship isn’t worth it financially.
Instead of that approach, Manso looked at workers over a longer time period, capturing the earnings of more than 5,000 American adults between 1979 and 2012. The average annual earnings for a self-employed person in the sample is higher than for a salaried worker, while the median is lower. That squares with previous research, and with intuition: a small number of entrepreneurs will make a lot of money, but the typical entrepreneur will make less than they could at a bigger company.
However, according to Manso’s data, most entrepreneurs eventually go back to salaried work; just over half of self-employment stints last for two years or less.
When Manso looked at lifetime earnings, he found that individuals who had been self-employed at one point in their career fared better, when compared to similar workers who hadn’t.
“Individuals who attempt to be entrepreneurs but abandon entrepreneurship in less than two years are not punished, achieving approximately the same earnings as similar individuals who have not attempted to be entrepreneurs,” he reports in the paper. “At the same time, entrepreneurs who stay longer than two years, make substantially more than similar salaried workers.”
“Overall,” he concludes, “I find that entrepreneurs earn approximately 10% more than salaried workers with similar characteristics.”
Manso’s theory of why people might try entrepreneurship and then head back to the labor market just a year or two later hinges on experimentation. Stepping away from a job to start a company offers a chance to experiment with a new idea, and to see if it works or not. If the idea works, the entrepreneur stays self-employed; if the idea doesn’t work, they get another job.
The data can’t explain why that next job pays as much or more than the entrepreneur would have made if they’d never been self-employed. “It seems that the labor market values the experience [of being] self-employed,” said Manso by email. “Maybe the skills developed during [a] self-employment spell are useful as [a] salaried worker.”
As Manso notes, and as economist Noah Smith noted in a column about the paper last year, this data isn’t limited to the sort of entrepreneurs who raise venture capital or typify Silicon Valley. More likely, it includes mostly small business owners in sectors like retail or food service. Still, it’s at least plausible that something similar happens for growth entrepreneurs. There are plenty of ways for an entrepreneur to mitigate the risk of starting a business, for instance by developing an area of expertise, which could conceivably translate into higher wages should the venture fail. And for younger workers, founding or joining a startup can mean a more senior title with more responsibility, which might translate into a better job at an established firm later on.
Like everything else, the devil is probably in the details. Whether a stint as an entrepreneur pays off financially will depend on the person, the career, and the business in question. Manso’s research is a reminder that entrepreneurship needn’t be a lifelong commitment. It is possible to found a startup and later return to an established company. Sometimes it’s even the best way to ensure a return on your entrepreneurial investment.
Walter Frick is a senior associate editor at Harvard Business Review.
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