Earnings Growth among Young Less-Educated Business Owners

Academicians and policymakers have argued that self-employment provides a route out of poverty and an alternative to unemployment or discrimination in the labor market. Existing research, however, provides little evidence from longitudinal data on the relationship between business ownership and economic advancement for disadvantaged groups. I use data from the National Longitudinal Survey (NLSY) to examine the earnings patterns of young less-educated business owners and make comparisons to young less-educated wage/salary workers. Using fixed-effects earnings regressions, I find that the self-employed experience faster earnings growth on average than wage/salary workers after a few initial years of slower growth. Simulations based on these estimates indicate that earnings grow by $771 and $1157 more per year for self-employed men and women, respectively, than for their wage/salary counterparts. I also find that a relatively high percentage of less-educated business owners, especially men, experience either rapid earnings growth or large annual losses. For example, 19 percent of self-employed men experience earnings growth of more than $3,000 per year and 16 percent experience losses of $3,000 or more per year. In contrast, only 14 percent of male wage/salary workers experience levels of earnings growth that fall in this range.