Self-employment, entrepreneurship, and the NLSY79: researchers have used the rich data from the 1979 cohort of the National Longitudinal Survey of Youth to investigate the relationship between self-employment and various job and earnings outcomes; future inquiry may afford valuable insights into other interesting consequences of self-employment

Monthly Labor Review, Feb, 2005 by Robert W. Fairlie

A relatively small, but growing, body of literature uses microdata from the 1979 National Longitudinal Survey of Youth (NLSY79) to study self-employment and entrepreneurship among young adults. The topics covered in these studies include, but are not limited to, the determinants of entrepreneurship, earnings growth among entrepreneurs, the returns to self-employment, the relationship between criminal activities and self-employment, and job satisfaction among the self-employed.

The NLSY79 is a nationally representative sample of 12,686 men and women who were between the ages of 14 and 22 when they were first interviewed in 1979. (1) Survey respondents were interviewed annually from 1979 to 1994 and biannually starting in 1996. Most previous studies using this survey exclude the sample of 1,280 youths designed to represent the population enlisted in the four branches of the military as of September 30, 1978, but retain the supplemental sample of 5,295 civilian black, Hispanic, and economically disadvantaged nonblack, non-Hispanic youth. The NLSY79 contains a wealth of information on the demographic, economic, family background, educational, and psychological characteristics of respondents. Detailed measures of the group's labor market and life experiences from early adulthood to the mid-forties can also be created for survey respondents.

The NLSY79 is an excellent source of data for conducting research on self-employment and entrepreneurship. The wealth of information available in the survey allows one to build rich empirical models of the entrepreneurial process. Measures of previous wage and salary, self-employment, and unemployment experience can be created, and the NLSY79 contains several uncommon variables, such as those associated with detailed asset categories, family background information, data on criminal activities, Armed Forces Qualification Test (AFQT) scores, and psychological characteristics. Furthermore, a plethora of measures of the dynamics of self-employment may be extracted from the longitudinal data in the survey. For example, measures of transitions to and from self-employment, number of years of self-employment, and whether an individual ever tries self-employment can easily be created. Finally, the returns to self-employment, measured as earnings, job satisfaction, net worth, or other outcomes, can be estimated. Changes over time in labor market status can be used to identify the effects of self-employment, potentially removing biases created by unobserved heterogeneity across individuals. Given these advantages, it is somewhat surprising that more researchers have not used the NLSY79 to study self-employment. In the sections that follow, this article presents estimates of self-employment from the NLSY79, reviews findings from previous studies that used the survey, and discusses some of the merits of the data sets making up the survey.

Self-employment in the NLSY79

In most previous studies using the NLSY79, self-employed workers are defined as those individuals who identify themselves as self-employed in their own business, professional practice, or farm in response to the class-of-worker question relating to the current or most recent job. Unpaid family workers are not counted as self-employed. Individuals who report being enrolled in school and workers who report working fewer than 300 hours in the previous calendar year are often excluded. The hours restriction rules out very small scale business activities.

Self-employment rates increase rapidly as the NLSY79 cohort ages. (See chart 1.) The self-employment rate is defined as the fraction of workers that is self-employed. At age 22, only 5.1 percent of men and 2.6 percent of women are self-employed. By age 42, however, 12.1 percent of men and 9.8 percent of women are self-employed.

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The following tabulation shows that self-employment rates also differ substantially by race and its ethnicity:

                         NLSY79 data

                    Men                 Women

              Self-                 Self-
 Race or    employment   Sample   employment   Sample
ethnicity      rate       size       rate       size
            (percent)             (percent)

Black           5.3      14,448      3.2       13,469
Hispanic        7.4      10,153      4.9        8,404
White          10.1      31,803      6.9       29,006

As in previous studies, blacks and Hispanics are much less likely to be self-employed than are whites. (2) Only 5.3 percent of black men are self-employed, compared with 10.1 percent of white men. The Hispanic male rate of 7.4 percent is also lower than the white rate, but higher than the black rate. Among women, the black-white and Hispanic-white self-employment rate ratios are similar to those for men. The main difference is that women's self-employment rates are lower than men's for all three racial and ethnic groups.

The determinants of self-employment. A few patterns are beginning to emerge in the young and expanding literature on self-employment. The empirical studies in this literature generally find that being male, white, older, married, and an immigrant and having a self-employed parent, more assets, and more education increase self-employment. In contrast, theoretical models of self-employment posit that attitudes toward risk, entrepreneurial ability, and preferences for autonomy are central to the individual's decision to become self-employed or engage in wage and salary work. (3) Perhaps not surprisingly, there is very little empirical evidence on the importance of these unobservable characteristics in the self-employment decision. One article that uses the NLSY79 offers indirect evidence by examining the relationship between drug dealing and legitimate self-employment: (4) a review of ethnographic studies in the criminology literature indicates that drug dealing may serve as a useful proxy for a low aversion to risk, entrepreneurial ability, and a preference for autonomy.