The income return to entrepreneurship – theoretical model and outcomes for Swedish regions

This paper investigates the income return to entrepreneurship and wage employment by means of Lazear’s model of occupational choice. The income return of an actor is defined as the income resulting from the preferred occupational choice divided by the hypothetical income he or she would earn, if for some reason forced to make the opposite choice. We analyze this by deriving theoretical implications of assuming that the skill strengths in Lazear’s model are Fréchet distributed. In the empirical part of the paper, data from the Swedish employment register for individuals having a university exam in electrical engineering is used to compute the return to self-employment and wage employment. The results are reported by a division of Sweden into three regions and for different subgroups by sex, age and earlier experience of self-employment. Our computations show that the average return to entrepreneurship is less than 5 percent for most subgroups of self-employed and the average return to wage employment over 50 percent for more than half of the subgroups. The return to the self-employed hiring at least one person is higher in the Stockholm than the other regions. Self-employed have higher returns if they are males, 45 years or older, or if they have earlier experience of self-employment. The ratio between average income of self-employed and wage employed is less than 1 for almost all subgroups in all regions consistent with our theoretical model. Together with the similarities between computed and observed income distributions for self-employed and wage employed, this supports the Fréchet assumption in our application of Lazear’s model.