People are becoming more exposed to entrepreneurship careers through television and social media, and through the large rise in incubators and university entrepreneurship programs. As a potential career path, employees may want the flexibility and satisfaction of being their own boss and earning more through self-employment. But will they succeed on both these counts? When someone leaves traditional employment and starts their own business, are they actually able to improve their salary or at least able to improve their job satisfaction?
These questions are addressed in my recently published research study using data from the National Science Foundation on more than 28,000 scientists and engineers to track their employment changes and work outcomes over time from 2003 to 2010. The sample includes scientists and engineers working in the United States in a full-time position with a for-profit firm and who have a Bachelor’s, Master’s or PhD in science or engineering. This data is useful because individuals can be studied over time and their transitions into self-employment and changes in their work outcomes analysed. This rich survey data also allows analysis of variables that are often unobserved such as job satisfaction and reasons for changing jobs.
This study reviews not only what happened to those who transitioned into self-employment, but also distinguishes between different types of mobility. More than 1,900 people who transitioned to self-employment and more than 7,000 people who transitioned to a new job in wage work were analysed.
One would assume that those who enter self-employment would do so to make more money. However, there is much research that finds that people in general make less in self-employment than those in traditional wage work. This has led researchers to wonder why people enter entrepreneurship despite earning less. The most popular argument is that people enter because they are willing to trade off salary for improvements in job satisfaction.
Many people enter for such benefits as being one’s own boss, diversity of tasks, reduction in job stress, absence of hierarchy at work, autonomy etc. However, some studies have found that the self-employed frequently work longer hours than wage workers, have greater workloads and job-related demands, and higher levels of stress from job responsibilities and financial uncertainty. Self-employed people have also been found to sleep less, worry more, and have less leisure time.
The research provides observations of the mobility patterns of this highly educated population and studies what happens to their work outcome as they change employers. The results show that many workers who transition to self-employment do not improve their salary, and while they have a spike in job satisfaction initially upon transitioning, this satisfaction diminishes over time until there are no significant improvements to salary or job satisfaction. The average loss in wages versus the average gain in job satisfaction is inconsistent with choosing self-employment over new wage work. Job satisfaction improves for all job changers, not just those who transition into self-employment. Workers with the highest salary and job satisfaction stayed at their current company and experienced an increase in salary but decline in job satisfaction. Workers who had the lowest average job satisfaction in the period prior to changing were more likely to move to a new employer in wage work and were able to increase both their salaries and job satisfaction. Meanwhile, those who moved to self-employment had the lowest average salaries in the period prior to changing.
While these results are true for some, it doesn’t mean it’s true for everyone. I argue that the changes in wages and job satisfaction will not be the same for all people and that the degree to which salary and job satisfaction change is based on the reason for changing employers in the first place. Different people enter self-employment for different reasons and they will see different results. For example, if someone chooses to enter self-employment because they believe that they could make more money by starting their own business, this motivator may affect a self-employed worker’s outcomes more greatly than someone who lost their job and enters self-employment because they believe that they have no other options.
I find that those who changed to self-employment for pay or promotion reasons had better returns on salary. People who choose self-employment to increase their salary are more likely to be opportunity entrepreneurs who have prepared for self-employment by making purposeful investments into human and social capital necessary to start a business. They are also more likely to start a business in an area of expertise, which should lead to a greater monetary return. Those who transitioned to self-employment for career reasons and working conditions had larger gains in job satisfaction. This seems to be the group most likely to sacrifice salary for improvements in job satisfaction. The group that had the most significant increases in salary were those who transitioned to a new employer in wage work for pay and promotion reasons.
The worst results for job satisfaction and salary change were for those who entered self-employment for market reasons such as layoff. These are often necessity entrepreneurs who move to self-employment as a last resort. Someone forced into self-employment is more likely to be unsuitable for self-employment and less likely to have entrepreneurial traits such as low risk aversion and self-determination. Changing employers for personal reasons such as family and location had limited impact on work outcomes, but instead may have affected non-job satisfaction.
The findings in this study provide important implications for wage workers and the self-employed. If pay is a main motivation for an individual changing employment then they should be able to achieve an increase in their wages, while those who seek to improve their current working conditions are also generally able to achieve that goal by changing to another employer either in traditional employment or self-employment. If someone has low job satisfaction in their current role, however, and income maximisation is a priority for them, switching to a new employer in wage work may be more beneficial than self-employment.
Self-employment is not one-size-fits-all and different groups of people and their motivations need to be considered when analysing work outcomes. Reasons for moving matter, and this is true for both moves to self-employment and to new wage work. Employees need to examine their reasons for changing positions before deciding to go into self-employment.
- This blog post is based on the author’s paper Are transitions to self-employment beneficial?, Journal of Business Venturing Insights, Volume 12, November 2019, e00131.
- The post gives the views of its author, not the position of LSE Business Review or the London School of Economics.
- Featured image by BBH Singapore on Unsplash
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Briana Sell Stenard is an assistant professor of management and entrepreneurship in the Stetson School of Business and Economics at Mercer University in Atlanta, Georgia. Briana earned her PhD in strategic management with a focus on entrepreneurship in the Scheller College of Business at the Georgia Institute of Technology. Her primary research focus is on the role of human capital in shaping entrepreneurial careers.