The long-term consequences of entrepreneurship: Earnings trajectories of former entrepreneurs

Abstract

Research Summary: Previous literature has documented a large short-term earnings gap for entrepreneurs that return to the wage sector. Using matched employer–employee data from the Belgian Labor Market & Social Protection Database, we document how this initial gap is remarkably persistent. Former entrepreneurs earn 27% less than propensity-scored matched controls 5 years after returning to wage work, which is almost unchanged from the short-term earnings drop. About 60% of this gap results from reductions in hours worked while the remaining 40% is due to reductions in the wage rate. We offer evidence that the decline in hours worked is a choice of former entrepreneurs and therefore reflects a compensating differential, while the decline in the wage rate is a penalty resulting from statistical discrimination by employers. Managerial Summary: While previous work recognizes that entrepreneurs experience reduced earnings when they return to the wage sector, little evidence exists about the long-term consequences of a spell of entrepreneurship. Using detailed administrative data from a large sample of Belgian entrepreneurs and wage employees, we document an earnings gap of about 27% compared with observationally equivalent employees 5 years after returning to wage work. About 60% of this earnings gap results from a reduction in hours worked, and this part appears to be the result of individual choices. The remaining 40% of the earnings gap is due to a decline in the wage rate, and this part appears to be imposed on returning entrepreneurs by employers.