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

Estimating fixed-effects earnings regressions for young men from disadvantaged families yields some evidence that self-employed business owners earn more than do wage and salary workers. (20) Estimates for young women, however, provide some evidence of lower earnings among self-employed business owners than among wage and salary workers. The results from these earnings comparisons are somewhat sensitive to the use of different measures of income and different econometric models.

In a related study, Justin van der Sluis, Mirjam van Praag and Arjen van Witteloostuijn (2004) estimate the returns to education for entrepreneurs and for wage and salary workers. (21) Using instrumental-variable regressions, they find that the returns to education are 14 percent for the self-employed, much higher than the 10-percent estimated return for wage and salary workers. The detailed data available in the NLSY79 allow these researchers to control for ability and to use family background characteristics, including the mother's and father's education, the presence of library cards in the household at age 14, and magazines present in the household at age 14, as instrumental variables for education.

Earnings profiles. The longitudinal nature of the NLSY79 enables one to compare earnings profiles for self-employed workers and wage and salary workers. Charts 2 and 3 display earnings-age profiles for full-time self-employed and wage and salary workers. For men (chart 2), average self-employment earnings are always higher and appear to grow at a rate similar to that of wage and salary earnings. For women, average self-employment earnings start out lower than wage and salary earnings, but then grow at a faster rate.

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To investigate the question of whether the self-employed experience faster earnings growth than do wage and salary workers, the NLSY79 allows fixed-effects regressions that include interactions between self-employment, on the one hand, and experience, potential experience, or tenure, on the other, to be estimated. Estimating fixed-effects regressions for hourly earnings for a sample of white, non-Hispanic men, Daiji Kawaguchi finds flatter earnings-experience/tenure profiles for self-employed workers than for wage and salary workers. (22) At 10 years of experience and job tenure, self-employed business owners earn 18 percent less than wage and salary workers. An earlier work by Fairlie compares men's and women's earnings profiles for whites, blacks, and Hispanics. (23) For white men, the point estimates from these earnings regressions indicate that the self-employed initially experience slower earnings growth than do wage and salary workers. After several years, the trend reverses, and self-employed persons experience faster earnings growth and higher earnings. For Hispanic men, the relative self-employment earnings coefficients suggest that the self-employed start at much lower earnings levels than do wage and salary workers, but experience faster growth rates. For white women, relative self-employment earnings start out positive and then become negative. Relative self-employment earnings coefficients are not statistically significant for black men, black women, or Hispanic women, possibly due to small sample sizes.