Transcript Entrepreneurial Incomes, Wealth and Economic Well-being Sara Carter Hunter Centre for Entrepreneurship

Entrepreneurial Incomes, Wealth
and Economic Well-being
Sara Carter
Hunter Centre for Entrepreneurship
University of Strathclyde Business School
Why don’t we research entrepreneurial
incomes?
Assumptions
1.
Researching incomes and wealth – too difficult, complex,
inconvenient and rude
2.
Successful entrepreneurship leads to fabulous wealth, failed
entrepreneurship can be personally catastrophic
3.
Incomes from self-employment are low, but the capital gain may
be great
4.
Incomes from self-employment are low, but the non-pecuniary
benefits are great (poor but happy)
5.
It doesn’t matter what entrepreneurs earn, because ‘real’
entrepreneurs will be entrepreneurial no matter what
Why does it matter?
• Understanding entrepreneurship implies understanding
the consequences of entrepreneurial action for
entrepreneurs
• Wage uncertainty is a major determinant of labour supply
among the self-employed (Parker, 1997)
Derivation of Entrepreneurial Rent
• Cantillon: rents from uncertainty bearing
• Von Thunen: includes a measure of judgement
• Knight: rents from uncertainty
• Schumpeter: rents from innovation and intuition
• Kirzner: rents from judgement, market making,
leadership
• RBV: rents from innovation, risk taking and judgement
Theorising Entrepreneurial Incomes
• Investment and agency models (e.g. Lazear and Moore,
1984; Lazear, 2005; Astebro and Thompson, 2007)
• Matching and learning models (e.g. Jovanovic, 1982)
• Superstar models (e.g. Rosen, 1981; Krugman, 2007)
• Compensating differentials (e.g. Blanchflower and
Oswald, 1992)
Measuring Entrepreneurial Incomes
•
Net profit
•
Draw
•
Equity adjusted draw
•
Hourly wage = Income
Hours
Entrepreneurial Incomes
• Lower initial earnings
• Lower earnings growth than in paid employment
• Median earnings differential 35% after 10 years
• Median earnings never overtake alternative entry wage
available on a paid job with zero tenure
• Results hold across all 3 measures and all sectors
(Hamilton, 2000)
• Longer hours - explained by self-insurance (Parker,
1997)
Assumption of Compensating Differentials
“The self-employment earnings differential reflects entrepreneurs’
willingness to sacrifice substantial earnings in exchange for the nonpecuniary benefits of owning a business” Hamilton, 2000: 629
The self-employed “have control over their lives as well as being
highly satisfied with their lives” Blanchflower and Oswald, 2004)
“People who run their own businesses have greater job satisfaction
than people who don’t. I think part of it is that we’re trying to make
some sense of this paradox – that we really like it, but financially it
isn’t so great. So we create a myth that says because we like it and
it makes us happy, it must also make financial sense, because
otherwise there’s a kind of conflict we can’t resolve” Shane, 2008
Perceived Incomes and Life Quality
Low Income
High Income
Low Quality of
Life
Worse Quality of Life,
Worse Financial Status
18.3%
Worse Quality of Life,
Better Financial Status 7.5%
High Quality of
Life
About the
same 34%
Better Quality of Life,
Worse Financial Status
12.8%
Better Quality of Life,
Better Financial Status
27.4%
Rich and Happy, Poor and Miserable
The Myth of the Compensating Differential?
“Money buys happiness. People care about relative incomes”
Blanchflower and Oswald, 2004
Q.
Why do people persist in self-employment despite low earnings –
if there is no compensating differential?
A.
Perhaps because a much larger proportion of the self-employed
earn a relatively decent living than we are able to measure using
conventional means?
Entrepreneurship and Wealth
• Entrepreneurs comprise 9% US households, 38% of
total household assets, 39% of total net worth
Q.
If incomes cannot account for wealth, what does?
A1.
Different patterns of accumulation and savings
incentives provide the means and motive to get rich
A2.
Wealth is not an output of entrepreneurship, it is an
input – wealthy people become entrepreneurs more
than entrepreneurs become wealthy
Measuring Incomes and Wealth
and Economic Well-being
• Definitional aspect – what to include, eg. draw, capital gains?
• Distribution aspect – variation in earning by sector, region, time?
• Economic status aspect – wealth, assets and savings?
• The multiple income aspect – household income may include other
income streams?
• Business-household aspect – permeable boundaries between
business and household regarding earnings, overheads,
expenditure and consumption?
Measure the Alternatives?
• Consumption
• Comparative occupations and lifestyle
• Expenditure
• Evidence of weak link between income and expenditure for
the self-employed
• Savings
• Evidence of higher (rainy day?) savings for the self-employed
Centrality of Entrepreneurial Household
• Management of uncertain and irregular business incomes
• Negotiation of low earnings in self-employment
• Negotiation of savings and expenditure patterns
• Household subsidy for entrepreneurship
• Short-term pain in expectation of future value – transitional entry
thesis
• Long-term and stable means of earning a living - survival of a
traditional (peasant) economy thesis?
Entrepreneurial Incomes, Wealth and
Economic Well-being:
Towards a Research Agenda
Overarching aim:
To explore the economic well-being of the entrepreneurial household
Q1
Q2
Q3
Q4
What is the nature of ‘rational choice’ in the entrepreneurial
household?
How is economic risk and insecurity managed within the
household?
Is there evidence of transitional entry / exit thesis or
traditional economy thesis
What is the relationship between household, business and
economy, and how does it evolve over time?