Self‐employed But Looking: A Labour Market Experiment

Abstract

We examine whether having previously been self-employed is a negative signal on the job market. In a UK field experiment where two applications of otherwise equally qualified individuals were sent out in response to the same vacancies in human resource management, we find that entrepreneurs systematically receive fewer responses than non-entrepreneurs. Empirical studies that treat market wages as the opportunity cost of remaining self-employed are therefore likely to overestimate alternative earnings to entrepreneurship.

Prior Wage and the Returns to Entrepreneurship

“…Gibbons & Katz, 1991;Greenwald, 1986). However, our findings are inconsistent with suggestions made by previous studies that the wage penalty is coherent with models of human capital depreciation (Mincer & Ofek, 1982), either because former entrepreneurs' job-, firm-, or sector-specific skills atrophy during their spell of entrepreneurship (Williams, 2000) or because they lose out on valuable job-training opportunities (Koellinger et al, 2015). The penalty for employees from the right of the wage distribution would then result from a higher atrophy rate for occupations that require high ability (Polachek, 1981).…”

“…Surprisingly, until recently, little attention has been paid to examine the returns from selfemployment experience outside the entrepreneurial context (Burton, Sørensen, & Dobrev, 2016). Despite this growing interest, current studies have provided mixed evidence on the question how a past entrepreneurial experience affects a person's outcomes in the labor market upon returning to wage work: a number of studies find that former entrepreneurs tend to incur a wage cost upon to wage work (Baptista, Lima, & Preto, 2012;Bruce & Schuetze, 2004;Failla, Melillo, & Reichstein, 2017;Kaiser & Malchow-Møller, 2011), and receive fewer responses on job applications (Koellinger, Mell, Pohl, Roessler, & Treffers, 2015). Others find no significant wage penalty (Hyytinen & Rouvinen, 2008;Luzzi & Sasson, 2016;Manso, 2016) and suggest that former entrepreneurs move to a position higher in the firm hierarchy when they are hired (Baptista et al, 2012).…”

Entrepreneurship and employment stability — Job matching, labour market value, and personal commitment

“…Accordingly, Daly (2015) and Campbell (2013) suggested a positive effect of long-term earnings from entrepreneurial experi-ence. In sum, the tendency for entrepreneurs to have lower re-entry wages could be associated with some sort of negative signal or stigma (Koellinger et al, 2015). We add to this literature by more intimately tying this finding to turnover tendencies of entrepreneurs and demonstrating that the expected pay cut hinders entrepreneurs' decision to exit.…”

“…Bruce and Schuetze (2004) found that for male workers, an additional year in selfemployment reduced future earnings in the wage sector by 3% to 11%, increased the probability of unemployment by 3% to 10%, and increased the probability of parttime employment by 10% to 30%. In addition, experimental evidence indicates that compared to non-entrepreneurs, entrepreneurs receive significantly fewer job offers when they attempt to reenter the wage sector (Koellinger et al, 2015). Entrepreneurs returning to wagework could be penalized in the labor market because their skill set may be less applicable or because of statistical discrimination if the recruiter 1 Some question this finding and argue that the opposite applies (see e.g.…”

“…Entrepreneurs returning to wagework could be penalized in the labor market because their skill set may be less applicable or because of statistical discrimination if the recruiter 1 Some question this finding and argue that the opposite applies (see e.g. Campbell, 2013;Fairlie, 2002;Hamilton, 2000;Kaiser and Malchow-Moller, 2011) assumes that an entrepreneur who seeks wagework has experienced the failure of a firm (Koellinger et al, 2015). This unfair treatment in the labor market has been associated with the "stigma of failure" (Landier, 2006).…”