research@hec - Issue #36 - (Page 4)

entrepreneurship research hec Earnings from entrepreneurship: less than salaried employment or just less measurable? With the exception of a few high-flying lawyers and other such "superstar" entrepreneurs, individuals who switch to self-employment tend to earn less on average than they do as wage-earning employees. They also work longer hours and no longer receive paid leave. Is there a rational explanation as to why so many choose the entrepreneurial path in spite of these disadvantages? Could the lower earnings associated with entrepreneurship be a function of income underreporting? Thomas Astebro B iography Thomas Åstebro teaches High Tech Entrepreneurship and Managing Innovation at HEC, which he joined in 2008. He holds a Master's in Engineering and an MBA from Chalmers University of Technology in Sweden, as well as a Ph.D. from Carnegie Mellon University in Pittsburgh, USA. He has taught at University of Waterloo and at University of Toronto in Canada and regularly works EXPLAINING THE ENTREPRENEURIAL CHOICE As Thomas Astebro and his co-author Jing Chen write in their recent article on the subject, there are many as a consultant to entrepreneurs. 4 * j a n ua r y Cubicle-dwellers dreaming of becoming self-employed might want to consider the following sobering facts before quitting their day jobs. On average, entrepreneurs earn 4% to 15% less per year than their wage-earner counterparts, work longer hours, experience higher income risk, and their earnings rise less quickly over time. Only a small fraction of entrepreneurs end up making a lot more money than they did as employees . In other words, for every Richard Branson, there are thousands of restaurant owners, graphic designers, and plumbers slaving away for less than what they would as salaried employees. If a difference in earnings of 4% to 15% per year doesn't sound like much, as Thomas Astebro points out, "Over a lifetime, it adds up to a substantial amount in terms of foregone earnings." Academics were the only segment of the population for which the researcher did not find a significant income discrepancy between salaried employees and independents. He suggests the main reason is the "academic discount," or downward pressure on university salaries, related to the strong demand for academic positions regardless of pay level. Other than that exceptional case, the puzzle remains: why would any rational individual choose to become an entrepreneur instead of a salaried employee if it were both riskier and less rewarding in financial terms? - f e b r ua r y 2014 theories competing to solve the riddle of the entrepreneurial choice. "Matching and learning" models, and others based on labor market frictions, look at the entry and exit mechanisms of the entrepreneurial and wage markets. "For example, those with lower abilities get squeezed out of the labor market, and when fired go into entrepreneurship," says Thomas Astebro. In that case, lower skills would thus explain lower wages. Also, those who have already invested considerable amounts into entrepreneurship may persist even with lower realization in misguided attempts to recover sunk costs. Another potential explanation for the preference for entrepreneurship might simply be the non-financial rewards offered by independent work, such as autonomy, flexibility, and better use of personal skills. Who can argue against pursuing a passion for photography or stand-up comedy, even if it comes at a cost? But is there truly a cost, or might the earnings gap simply be a function of income underreporting? HIDING INCOME FROM THE TAXMAN The most potent explanation that Thomas Astebro and his co-author found was income underreporting by entrepreneurs. Indeed, entrepreneurs have many opportunities to work without invoicing, while, in contrast, notes the researcher, "for a wage-earner, it's nearly impossible." He points out that tax evasion is a strong motivation to underreport income. It is an established fact that 99.5% of wages and salaries were voluntarily reported to US tax authorities in 1987 versus only 51% of known entrepreneurial earnings. Thomas Astebro

Table of Contents for the Digital Edition of research@hec - Issue #36

Cover & Table of Content
To prosper in a crisis, adopt the strategy of large family businesses !
Earnings from entrepreneurship: less than salaried employment or just less measurable ?
When should you spawn an innovation ?

research@hec - Issue #36