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 non- pecuniary 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

Worse Quality of Life, Better Financial Status 7.5% Worse Quality of Life, Worse Financial Status 18.3% About the same 34% Better Quality of Life, Worse Financial Status 12.8% Better Quality of Life, Better Financial Status 27.4% Low IncomeHigh Income Low Quality ofLife High Quality ofLife Perceived Incomes and Life Quality

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 Q1What is the nature of ‘rational choice’ in the entrepreneurial household? Q2How is economic risk and insecurity managed within the household? Q3Is there evidence of transitional entry / exit thesis or traditional economy thesis Q4What is the relationship between household, business and economy, and how does it evolve over time?