Self-Employment, Family-Business Ownership, and Economic Mobility

Research Report

Self-Employment, Family-Business Ownership, and Economic Mobility

Abstract

Surprisingly little is known about whether self-employment and family businesses promote mobility, despite a recurring theme in the policy discourse of families achieving upward economic and social mobility through entrepreneurship. The rewards of entrepreneurship can be great for those who succeed, but the risks are also greater. Looking over numerous decades of panel data on Americans, we document that family-business owners have more upward mobility and less downward mobility than wage-and-salary workers, but that the self-employed do not outperform other workers.

Overview

The American Dream has often included the idea of founding a successful small business. But when it comes to economic mobility, do entrepreneurs and small business owners actually get ahead?

Key findings

  • Self-employment doesn’t help upward mobility or protect against downward mobility. The self-employed are actually more likely than wage-and-salary workers to move down the income ladder.
  • Children of the self-employed are often more upwardly mobile than their parents, particularly if their fathers had low initial income.
  • Very short-term entrepreneurs are more likely to be white, married, and college educated and to have no children.
  • Workers who stay in wage-and-salary jobs are the most likely to stay in the same income class after five years.
  • Workers who leave wage-and-salary jobs to become entrepreneurs are the most upwardly mobile and the least likely to stay in the lowest income class.
  • Self-employment may play an equalizing role over a generation. The children of richer self-employed dads experience less upward mobility than children of rich wage-and-salary workers.

Key numbers

  • Fourteen percent of the survey respondents reported self-employment and about 15 percent reported family-business ownership.
  • Fourteen percent of self-employed respondents had not achieved a high school degree, whereas 9 percent of family-business owners had done so.
  • Fifty-seven percent of survey respondents report having participated in self-employment or family-business ownership for as little as one year at any point from 1968 to 2009.
  • Forty percent of entrepreneurs who became wage-and-salary workers and started at the bottom income class remained there five years later, compared with 56 percent of wage-and-salary workers turned entrepreneurs.
  • Seventy-five percent of those who remained wage-and-salary workers stayed in the bottom income class, compared with 61 percent of those who remained entrepreneurs.

Policy recommendations

  • Cost-benefit analyses of policies promoting entrepreneurship should take into account income volatility and changes in economic-mobility outcomes between parents and children.
  • Financial literacy and budgeting training programs should be used to help prospective entrepreneurs make decisions that promote their own economic interest through.

Cross-Center Initiative

Cross-Center Initiative: 
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