Self-Employment: More May Not Be Better
Despite the fact that very high proportions of employees say they would like to set up their own business, the reality is quite different... Being self-employed is difficult and appears to require rare talents.
A recent body of economic literature supports the notion that the self-employed are more satisfied with their jobs than are employees. The research finds this to be true across most OECD countries, with Austria, Finland, and Greece the major exceptions.
However, in Self-Employment: More May Not Be Better (NBER Working Paper No. 10286), NBER Research Associate David Blanchflower distinguishes a number of less desirable aspects of being self-employed which do not appear to have been quantified previously. His study helps to explain why so many of those who express a desire to become self-employed are thwarted in that desire for many reasons, including the difficulty in obtaining capital.
Blanchflower finds that self-employment rates are generally down across the OECD. The main exceptions are the United Kingdom and New Zealand. The strong patterns evident in the data across countries show that the probability of being self-employed across the OECD is higher for men and for older workers as compared with younger workers. In Europe, the probabilities of being self-employed are lower the more educated an individual is, while the opposite is true in the United States. Some groups of immigrants also have higher rates of self-employment than the indigenous population.
Capital constraints appear to bind especially tightly in the United States for firms owned by minorities and women. The low rates of self-employment of blacks and Hispanics in the United States appear, in part, to be driven by liquidity constraints. There is evidence that liquidity constraints are felt in other countries as well, including the United Kingdom, Finland, Australia, Canada, and Sweden.
Blanchflower suggests that people may have an unrealistically rosy view of what it is like to run their own business, rather than staying with the comparative security of being an employee. A surprisingly high proportion of employees say they would prefer to be self-employed. Despite the fact that very high proportions of employees say they would like to set up their own business, the reality is quite different.
The evidence in this paper suggests that people may well be able to judge what is in their own best interest, which is precisely why they remain as employees. The self-employed work under a lot of pressure; they report that they find their work stressful; they come home from work exhausted and are constantly under strain; they lose sleep due to worry; and they place more weight on work than they do on leisure. However, they are also especially likely to say that they have control over their lives and to report a high level of satisfaction with their lives. Being self-employed is difficult and appears to require rare talents; Blanchflower concludes that self-employment is not for everyone.
-- Les Picker