This literature overview examines five studies investigating the monetary returns to entrepreneurship compared to wage employment. It starts with a summary of findings up to 2007 by observing a meta study and follows by analyzing four recent empirical analyses. These apply various approaches to discover the link between entrepreneurship and individual remuneration: investigating returns to ability, comparing twins, using a broad definition of entrepreneurship, and correcting for underreporting. The results do not indicate a clear direction. Negative, positive and similar returns for entrepreneurs compared to employed individuals are found. However, if one assumes the problems of a restrictive definition of entrepreneurship and of income underreporting to be generally relevant, higher earnings of entrepreneurs seem plausible.
Table of Contents
1 Introduction
2 State of Affairs in 2007
3 Negative Returns
3.1 Returns to Ability
3.2 Within-twin-analysis
4 Positive Returns
4.1 Limited Liability Company Entrepreneurs
4.2 Income Underreporting
5 Comparison of Results
6 Conclusion
Research Objectives and Themes
The primary objective of this seminar paper is to examine the individual remuneration of entrepreneurs by comparing their income levels with those of wage employees. The study addresses the ongoing scholarly debate regarding whether entrepreneurship yields higher or lower financial returns compared to traditional wage employment, while specifically accounting for methodological variations and income reporting biases in existing literature.
- Analysis of monetary returns to entrepreneurship versus wage employment.
- Evaluation of the impact of individual abilities and human capital on earnings.
- Investigation of income underreporting and its effect on remuneration estimates.
- Examination of entrepreneurship definitions, including LLC owners versus self-employed individuals.
- Comparison of empirical approaches ranging from meta-studies to twin-analysis.
Excerpt from the Book
Returns to Ability
Hartog et al. (2010) not only observe differences in employee wages and entrepreneur earnings, but explicitly analyze links between individual abilities and labor market returns. They observe the returns to a person’s general skill set, the income gain from specific abilities, and the effect of the variance of individual skills on earnings. Their Mincer-style income equations indicate higher returns to several abilities for entrepreneurs, which nonetheless do mostly not outweigh the overall negative income premium of entrepreneurship they find.
The authors define entrepreneurship in line with established practice, as self-employment or owning-managing an incorporated company. Farmers and individuals working less than 300 hours per year as an entrepreneur are not seen as such, as well as persons being an entrepreneur for less than six months. An employee is defined as an individual whose principal occupation is a paid job by the authors, while entrepreneurial income is the gross hourly income (yearly income divided by hours worked).
Hartog et al. use panel data from the National Longitudinal Survey of Youth (NLSY), which is conducted by the U.S. Bureau of Labor Statistics since 1979. It observes 6,111 persons representative of the U.S. population and aged 14 to 22 years in 1979. The survey participants were interviewed every year until 1994 and biannually after that. The researchers use a data set from 1979 to 2000 consisting of employees and entrepreneurs (defined above), resulting in an average sample size of 4,500 individuals per year. For one person, they obtain eleven yearly observations on average.
Summary of Chapters
1 Introduction: Introduces the economic importance of entrepreneurship and outlines the central research question regarding the comparative remuneration of entrepreneurs versus employees.
2 State of Affairs in 2007: Summarizes key literature prior to 2007, noting the lack of a clear consensus and the ambiguity in defining entrepreneurship and remuneration.
3 Negative Returns: Investigates research indicating lower financial rewards for entrepreneurs, focusing on specific ability returns and within-twin analysis.
4 Positive Returns: Discusses recent studies that suggest positive income premiums when broadening the definition of entrepreneurship or accounting for income underreporting.
5 Comparison of Results: Evaluates the robustness of the reviewed studies and contrasts their findings, highlighting differences in data, methodology, and definition.
6 Conclusion: Synthesizes the evidence, suggesting that when realistic definitions and reporting biases are considered, positive financial returns to entrepreneurship are plausible.
Keywords
Entrepreneurship, Individual Remuneration, Wage Employment, Income Underreporting, Returns to Ability, Within-twin-analysis, LLC Entrepreneurs, Human Capital, Monetary Returns, Labor Market, Economic Growth, Financial Performance, Income Volatility.
Frequently Asked Questions
What is the core subject of this paper?
The paper examines the individual financial remuneration of entrepreneurs compared to wage employees to determine if entrepreneurship is a financially rewarding career path.
What are the primary themes discussed?
The themes include the impact of individual abilities on earnings, the role of income underreporting, the influence of entrepreneurial definitions, and the comparison of various empirical research methods.
What is the central research question?
The paper asks: "Does it pay to be an entrepreneur?" by evaluating how entrepreneur income compares to employee wages across different study methodologies.
Which scientific methods are analyzed?
The author reviews meta-studies, cross-sectional and panel data analyses, twin-differencing (WT) methods, and instrumental variable (IV) models to account for ability and income mismeasurement.
What is covered in the main body?
The main body is structured into a review of findings from 2007, a detailed examination of studies finding negative returns, an analysis of research showing positive returns, and a comparative critique of these diverse findings.
Which keywords best characterize the work?
Key terms include Entrepreneurship, Individual Remuneration, Income Underreporting, Returns to Ability, and LLC Entrepreneurs.
Why are LLC (Limited Liability Company) owners highlighted as a specific group?
Berglann et al. (2011) argue that excluding LLC owners misses a central aspect of modern entrepreneurship—the combination of human and financial capital—which leads to significantly different findings regarding financial returns.
How does income underreporting affect the research results?
Research by Astebro and Chen (2014) suggests that traditional studies may underestimate entrepreneurial income due to tax-related reporting biases, and correcting for this suggests higher financial returns for entrepreneurs.
- Quote paper
- Justus Kirchhoff (Author), 2016, Entrepreneurship and individual remuneration. Does it pay to be an entrepreneur?, Munich, GRIN Verlag, https://www.grin.com/document/371176
