Academic journal article Entrepreneurship: Theory and Practice

Individual Entrepreneurial Exit and Earnings in Subsequent Paid Employment

Academic journal article Entrepreneurship: Theory and Practice

Individual Entrepreneurial Exit and Earnings in Subsequent Paid Employment

Article excerpt

We study earnings of individuals who exit entrepreneurship for paid employment. We find mean (median) positive rewards from entrepreneurship in subsequent paid employment relative to matched employees. Rewards are higher for former entrepreneurs hired in highly innovative sectors. We also find that the performance of the exited firm is a strong predictor of the earnings premium for former entrepreneurs when the firm performed well, while we do not find median discounts for entrepreneurs exiting low performing firms. We use registry data that encompass the population of firms and individuals in the Norwegian economy.

Introduction

Despite working longer hours and being exposed to more financial, social, and psychological costs (Hessels, Grilo, Thurik, & van der Zwan, 2011), entrepreneurs earn lower median incomes than employees in paid employment (Hamilton, 2000; Hyytinen, Ilmakunnas, & Toivanen, 2013). (1) Entrepreneurs are also more likely to earn exceptionally low or high incomes compared to paid employees (Rosen, 1981). The extant literature focuses extensively on rewards or discounts available during the entrepreneurial experience, comparing earnings of active entrepreneurs and non entrepreneurs. Focusing on entrepreneurs' (re-)entry into paid employment, this article contributes to the less developed literature on post entrepreneurial rewards or discounts in subsequent paid employment.

Post entrepreneurship earnings comparisons can substantially add to our understanding of entrepreneurship rewards and career dynamics for two main reasons. First, there is a stream of literature, starting with Knight (1921), which suggests that individuals pursuing entrepreneurship have not only peculiar traits and abilities (e.g., Astebro & Thompson, 2011; Lazear, 2004) but also peculiar motivations and preferences that make them choose entrepreneurship (e.g., Hamilton, 2000; Taylor, 1996). These peculiarities might explain why such individuals persist in entrepreneurship despite low returns (Hamilton), while also raising the issue of such individuals' suitability for paid employment at the post entrepreneurship period. Second, the analysis of entrepreneurship rewards should incorporate the estimation of potential premiums or discounts experienced after entrepreneurial exit through engagement in other types of economic activities. This has the potential to amend prevailing insights of negative returns from entrepreneurship (e.g., Hamilton).

Individual exit from entrepreneurship does not suggest failure because entrepreneurs exit both financially distressed and well-performing firms (Gimeno, Folta, Cooper, & Woo, 1997; Wennberg, Wiklund, DeTienne, & Cardon, 2010). Subsequent paid employment is the most common post entrepreneurship career path (Hessels et al., 2011). About half of new entrepreneurs return to paid employment within 7 years, and the probability of exiting decreases with duration in entrepreneurship falling from 10% to 0% by the 11th year (Evans & Leighton, 1989).

Results from empirical contributions on the effect of entrepreneurial experience on earnings after exit are mixed. Evans and Leighton (1989) find a positive but not significant difference between the return to self-employment experience and the return to wage experience in wage work, proposing that "workers who fail at self-employment return to wage work at roughly the same wages they would have received had they not tried selfemployment." Williams (2000) finds similar results for men but shows that the return to self-employment experience is lower than the return to paid employment experience for women. Hamilton (2000) indicates a positive and significant difference in the median wage for former self-employed individuals returning to paid employment and employees with the same level of total labor market experience, although the entry wage premium is lower for individuals with longer tenure in entrepreneurship. …

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