Entrepreneurship isn’t usually worth the risk, some research says, at least strictly in financial terms. Thankfully, plenty of people take the plunge anyway, because they’re drawn to it for other reasons, such as wanting to be their own boss, or wanting to pursue a personal passion.
But that conventional view is misleading, argues a recent paper by Gustavo Manso at the University of California, Berkeley. Instead, he finds that self-employment does pay off financially, but not in the way entrepreneurs might expect. The financial benefit doesn’t usually come from the entrepreneurship itself, but in the form of higher wages when the entrepreneur returns to the workforce.
However, according to Manso’s data, most entrepreneurs eventually go back to salaried work; just over half of self-employment stints last for two years or less.
When Manso looked at lifetime earnings, he found that individuals who had been self-employed at one point in their career fared better, when compared to similar workers who hadn’t.
“Individuals who attempt to be entrepreneurs but abandon entrepreneurship in less than two years are not punished, achieving approximately the same earnings as similar individuals who have not attempted to be entrepreneurs,” he reports in the paper. “At the same time, entrepreneurs who stay longer than two years, make substantially more than similar salaried workers.”
“Overall,” he concludes, “I find that entrepreneurs earn approximately 10% more than salaried workers with similar characteristics.”
Manso’s theory of why people might try entrepreneurship and then head back to the labor market just a year or two later hinges on experimentation. Stepping away from a job to start a company offers a chance to experiment with a new idea, and to see if it works or not. If the idea works, the entrepreneur stays self-employed; if the idea doesn’t work, they get another job.
Like everything else, the devil is probably in the details. Whether a stint as an entrepreneur pays off financially will depend on the person, the career, and the business in question. Manso’s research is a reminder that entrepreneurship needn’t be a lifelong commitment. It is possible to found a startup and later return to an established company. Sometimes it’s even the best way to ensure a return on your entrepreneurial investment.
Curated from: The Best Part of Entrepreneurship? Giving Up and Getting a Job [Harvard Business Review]
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