عواقب بازار کار از جادوهای خود اشتغالی: شواهد اروپا

We examine how those re-entering paid-employment after a brief self-employment spell fare upon return using data from the European Community Household Panel. Unconditionally, those re-entering paid-employment appear to have considerably lower wages than those staying in the wage sector. This difference appears to be larger in Europe than in the US. Conditional analysis suggests, however, that the difference is more apparent than real: It seems that Europeans select negatively into (and possibly out-of) self-employment, i.e., the likelihood of entering (and exiting) entrepreneurship correlates negatively with unobserved ability and/or in-paid-employment productivity. Our analysis of non-wage outcomes indicates that the selection is mostly involuntary, and that for highly educated men, the brief self-employment spells are unemployment in disguise.

Each year, hundreds of thousands of Europeans enter self-employment and start their own businesses, although many of them exit shortly thereafter.1 According to Business demography in Europe ( EC, 2004a), three-year survival rates of European enterprises born in 1998 ranged from 53.5% (Denmark) to 66.9% (Norway), the lowest survival rates being in general in the services sector, such as in the hotel and restaurant business. 2 Smallest businesses and self-employment ventures are terminated even sooner than that: the death rates of very small (0–4 employees) European enterprises was in 2000 about 4–5 times higher than those of slightly larger (5–9 employees) enterprises. 3 Despite the recurrence and prevalence of entrepreneurial exits, not much is known about what happens to those Europeans who leave self- for paid-employment after a short spell. What are the economic consequences faced by the exiting entrepreneurs? In particular, what is the effect of self-employment experience on (subsequent) wage and non-wage outcomes, such as job security? There is some evidence for the US on how those who revert back to paid-employment fare upon return (Bruce and Schuetze, 2004, Evans and Leighton, 1989 and Williams, 2000). This evidence suggests that a year of self-employment lowers earnings compared to a year of work experience, even though not all findings for the US are entirely consistent with each other or across different demographic groups. No comparable analyses exist for Europe, except for Williams (2003) providing related evidence for one country, Germany.4 The aim of this paper is to augment this earlier literature by providing the first comprehensive European evidence on these effects: Our data come from the European Community Household Panel (ECHP), which allows us to track flows from paid-employment either to self- or to unemployment, and back to paid-employment for most of the EU-15 countries. Lack of comprehensive evidence for Europe is surprising, especially since many European policy-makers appear to have a strong prior belief that exiting entrepreneurs are somehow ‘scarred’ and that those leaving self- for paid-employment after an entrepreneurial spell are not treated fairly upon returning to paid-employment. It has been argued, in essence, that European labour markets are ‘hostile’ to returning entrepreneurs, at least when compared to the US.5 This paper investigates whether the anecdotes and policy-makers' (somewhat pessimistic) views on the consequences of the short self-employment spells are supported by European labour market data: If the data backs the apparently strong prior perception, an additional year of self-employment should not only lower the earnings (of an exiting entrepreneur) relative to an additional year of paid-employment: It should lower them considerably and the effect should be larger in Europe than what has been documented for the US (by, e.g., Bruce and Schuetze, 2004 and Williams, 2000). If the European labour market appears not to welcome returning entrepreneurs, it is important to also examine why that might be the case: One possible reason for it is that leaving self- for paid-employment endows an individual with a stigma of failure. Such a stigma may emerge as an endogenous social norm ( Landier, 2002) and hardly improves the position of an exiting entrepreneur in any market he enters upon return, be it the capital or the labour market ( Gromb and Scharfstein, 2002). Earnings (or employment prospects) may also reduce if short self-employment spells erode or stagnate previously acquired job-specific skills (and, more generally, erode people's human capital; see, e.g., Bruce and Schuetze, 2004 and Williams, 2000). 6 While these are plausible explanations for the policy-makers' perception as well as for any ex post (end-of-period) wage difference between those with and without self-employment experience, the hostility of the European labour markets against exiting entrepreneurs may be more apparent than real. The perception and the potential wage difference may be due to natural job mobility and thereby attributable to selection. The two most obvious sources of selection are the choices to move to self-employment and return to paid-employment in a short time. If those who earn less in paid-employment select into self-employment, any wage difference upon return may be explained by differences in ex ante (start-of-period) wages. There are a number of explanations for low earnings in the wage sector, of which unobserved ability (i.e., low at-work productivity) and low reservation wages are among the most usual suspects. Selection out of self-employment after a short spell may also explain wage differences upon return. Besides low reservation wages, such differences could emerge if the individuals leaving self- for paid-employment come from the group of failing entrepreneurs (and if the propensity to fail is correlated with unobserved ability). Our basic empirical set-up borrows heavily from the earlier work done with US data, especially Bruce and Schuetze (2004). We examine labour market flows within a five-year window and focus on documenting the effects of brief self-employment experiences on subsequent wage outcomes. Whenever possible, we contrast our results from ECHP with those obtained earlier for the US and investigate how the effects of brief self-employment spells compare with those of brief unemployment spells. Unconditionally, i.e., when not controlling for observables and selection, the European policy-makers perception appears to hold: There is a large ex post wage difference between those with self-employment experience and those with continued paid-employment experience, and, in light of the available data, the difference seems to be larger in Europe than in the US. However, already an unconditional difference-in-differences analysis of the ex ante and ex post wages shows that the effect of short self-employment spells is more apparent than real. Once we use ex ante wage in this fashion as a control for selection into self-employment, and more generally, as a control for unobserved differences in productivity at paid-employment, the ex post wage difference between those with and without self-employment experience nearly disappears. All this suggests that European employees select negatively into (and possibly out-of) self-employment, i.e., that the likelihood of entering (and exiting) entrepreneurship correlates negatively with the unobservable ability and/or productivity of the employed. Our regression analysis and comparisons to the earlier analysis of Bruce and Schuetze (2004) for the US provide additional support for the view that a problem of negative selection may account for a larger share of the ex post wage difference in Europe than in the US, at least for men. In a regression controlling for a number of observables (demographics etc.), the estimated effect of brief self-employment spells on the wages of men reduces more in Europe than in the US when the ex ante wage is introduced as a control. Even for highly educated European men, to whom the effect might a priori seem particularly large and the stigma of failure pronounced, the negative effect of 4–5% that we find is conservative when compared to the range reported in Bruce and Schuetze (2004) for the US. However, neither this estimate nor our other estimates of negative effects are robust to introducing further controls for (negative) selection into and out-of self-employment. These results do not corroborate the available anecdotal evidence and appear to challenge at least the most aggressive perceptions of the hostility of the European labour market towards returning entrepreneurs: In light of the European Community Household Panel (ECHP) data, European entrepreneurs do not seem to suffer (either in absolute terms or relative to their US counterparts) from a disproportionately bad stigma of failure upon return. Albeit our treatment of the labour market consequences of short unemployment spells is not as comprehensive, we find that they appear to be worse than the consequences of short self-employment spells. In particular, our results in no way challenge the findings from the earlier literature which suggest that spells of unemployment can in Europe be ‘scarring’ and have (persistently) negative returns (e.g., Arulampalam, 2001, Burda and Mertens, 2001 and Pérez and Sanz, 2005). Besides delivering the first comprehensive evidence of these effects for Europe, we attempt extending the previous analyses and identifying a new direction for the future research by providing an analysis of the nature of selection driving our findings: To interpret our findings, it turns out to be instrumental to understand whether voluntary or involuntary selection into and out-of self-employment accounts for them. While we cannot be fully conclusive on this front, our analysis of a set of non-wage outcomes suggests that besides being negative, selection is mostly involuntary. Using indicators of non-wage outcomes that are available from ECHP, we find, first, that self-employment seems to be unemployment in disguise ( Earle and Sakova, 2000), especially for highly educated males: While self-employed, they are more likely to search for a new job in paid-employment than their less educated counterparts. The difference is not due to the higher propensity of the highly educated to search for a new job irrespectively of their current labour market status. Second, brief spells of self-employment are associated with increased probability of part-time employment upon returning to the wage sector, increased likelihood of outright unemployment, and decreased job security. This, too, suggests negative involuntary selection, in particular if most transitions to unemployment or job insecurity after self-employment can be characterized as involuntary (cf. Abowd et al., 1999 and Pérez and Sanz, 2005). Finally, there is some indication especially for men returning to paid-employment after a spell of self-employment that their perceived financial situation is worse when compared to those continuing in the wage sector. In the next Section 2, we describe our data, present a descriptive analysis of the frequency and duration of self- and unemployment spells in Europe, and contrast them to those of the US. In Section 3 we investigate the effects of brief self- and unemployment spells on wage outcomes both using univariate (unconditional) and multivariate (conditional) methods and address the question of selection. Non-wage outcomes are analyzed in Section 4. In Section 5, we summarize our findings and consider their policy implications.

Hundreds of thousands of Europeans enter self-employment each year, but self-employment spells are typically brief. Many of the new entrepreneurs therefore exit soon after entry. How do those who return to paid-employment fare in the labour market? Many European policy-makers appear to know the answer: those leaving self- for paid-employment after an entrepreneurial spell are not given a proper second chance. This paper investigates whether this perception of the consequences of the short self-employment spells is supported by the European Community Household Panel (ECHP), which allows us to track flows from paid-employment to self-employment and unemployment as well as the subsequent returns back to the wage sector. In an unconditional analysis, the European policy-makers perception appears to hold: There is a large ex post wage difference between those with self-employment experience and those with a continued work experience. Moreover, in light of the available data, the difference appears to be larger in Europe than in the US. However, unconditional and conditional difference-in-differences analyses of the ex ante and ex post wages show that the effect of short self-employment spells is not quite as real as many have thought. It appears that European employees select negatively into (and possibly out-of) self-employment, i.e., that the likelihood of entering (and exiting) entrepreneurship correlates negatively with the unobservable ability and/or productivity. Our estimations in which such selection is controlled for do not corroborate the available anecdotal evidence. We conclude that European entrepreneurs do not seem to suffer (either in absolute terms or relative to their US counterparts) from a disproportionately bad stigma of failure upon return. While not fully conclusive, our analysis of non-wage outcomes suggest that it could be negative involuntary selection that explains the large ex post wage difference between those with self-employment experience and those with a continued work experience. Indeed, self-employment seems to be unemployment in disguise ( Earle and Sakova, 2000), especially for highly educated males: While self-employed, they are more likely to search for a new job in paid-employment than their less educated counterparts. Our empirical treatment of the labour market consequences of short unemployment spells is not as comprehensive as that of the self-employment, but we nevertheless find that they appear to be worse than the consequences of short self-employment spells. Our results mostly corroborate the findings from the earlier literature suggesting that unemployment spells have negative returns (e.g., Arulampalam, 2001, Burda and Mertens, 2001 and Pérez and Sanz, 2005). The European Commission has especially in recent years intensified its efforts in promoting entrepreneurship. Its Green Paper on Entrepreneurship in Europe ( EC, 2003b, p. 4) insists, for instance, that “Europe needs to foster entrepreneurial drive more effectively.” A few years earlier the European Council approved the European Charter for small enterprises in 19–20 June 2000 recommending that the governments' should focus their strategic efforts on a number of actions believed to be vitally important for the operation of small enterprises. The findings of this paper suggest a number of conclusions that are relevant to the design of these policy efforts: First, they help to better understand the incentives of Europeans to enter self-employment in the first place. It seems that the prospect of having to face a hostile labour market upon return (after a short spell of self-employment) is not what hampers European entrepreneurship. Second, a problem of Europe appears to be its inability to make entrepreneurship an attractive career alternative for its best and brightest. What Europe needs is positive voluntary selection into entrepreneurship (instead of the negative involuntary selection that our results appear to imply). The nature of selection may for example explain why Europe is often said to have an insufficient amount of growth-seeking entrepreneurial activity. Moreover, if the entries into and exits from short-term entrepreneurship can on average be related to negative selection, it cannot be the case that a significant number of the best European talents test their new ideas or technological innovations on the market by making an entrepreneurial entry. The reason for this is that such experimenting is risky: Many of the talented making an ‘experimental’ entrepreneurial entry should re-enter the wage sector soon after entry, implying (possibly) positive selection. Finally, policy measures that aim for a more active market for mergers and acquisitions as well as deeper stock markets could facilitate positive selection out-of, and thus also entry into self-employment.