What Matters, and How: Does Procedural Utility Explain Self-Employment

By McClough, David; Hoag, John et al. | Academy of Entrepreneurship Journal, January 2014 | Go to article overview

What Matters, and How: Does Procedural Utility Explain Self-Employment


McClough, David, Hoag, John, Benedict, Mary Ellen, Academy of Entrepreneurship Journal


INTRODUCTION

Self-employed workers consistently report higher job satisfaction than paid workers despite evidence that self-employment requires more hours and pays less, on average. Previous research reveals that autonomy, the work itself, and opportunity for creativity drive the higher job satisfaction scores for the self-employed, and apparently compensate for lower pay and increased hours. Highly satisfied paid employees identify salary, benefits, opportunity for advancement, and responsibility as key factors. These distinct findings reveal that workers are not homogeneous. It reasons therefore that self-employed and paid workers likely specify utility functions with similar yet distinctly weighted arguments. Psychologists refer to procedural utility to distinguish benefits associated with the process of achieving utility linked to a particular outcome. Some economists have recently embraced the concept of procedural utility and have begun to evaluate the explanatory power of the concept.

This paper departs from the more common compensating wage approach. Rather than using employment status to explain job satisfaction, we model the effect of procedural and outcome utility on employment status. Empirically, our paper groups the attributes of job satisfaction using factor analysis to create explanatory variables conforming to procedural and outcome utility. We then use employment status as our dependent variable to assess the explanatory power of outcome and procedural utility. We do not, in this model, include the impacts of income on the individual's choice. In part, because individuals in our sample choose either paid or self-employment, we do not know the income foregone by that choice. Our analysis also includes measures of both procedural and outcome utility which are missing from most other papers.

Using the National Survey of College Graduates (NSCG) of 2003, we investigate the relationship between familiar job attributes and employment status. The NSCG provides demographic information, employment status, and data regarding the importance of key job attributes. The NSCG also indicates whether a respondent changed jobs in the past two years. With this data we are able to construct variables comprised of key job attributes that are inputs to procedural utility and the more traditional outcome-based utility. We include the constructed variables in a probit regression model for the full sample and for a subsample comprised of respondents who changed jobs in the past two years. The organization of this paper proceeds as follows: section II briefly summarizes the existing literature, section III presents the economic and econometric models, section IV states the research question and presents hypotheses for testing, section V describes the data and analysis, and presents the results, and conclusions are presented in section VI.

LITERATURE REVIEW

Studies grounded in microeconomics employ a utility maximization framework emphasizing the earnings differential between paid- and self-employment (Rees and Shah 1986, Evans and Leighton 1989, Dolton and Makepeace 1990). An established literature suggests that self-employment is more satisfying than paid employment (Blanchflower and Oswald 1998, Taylor 2004, Kawaguchi 2008, Benz and Frey 2008a). To explore why self-employment is more satisfying, research has focused on attributes beyond income.

Taylor (1996) suggests that the decision to pursue and sustain self-employment rather than paid employment implies greater utility associated with self-employment. Using UK panel data, Taylor finds that expected higher earnings and autonomy contribute to greater utility. Blanchflower and Oswald (1998) use longitudinal data from Great Britain to find that selfemployed workers report greater job and life satisfaction than paid employees. Job satisfaction numbers are higher for the self-employed despite evidence of lower average income (Hamilton 2000, Andersson 2008). …

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