Frontiers in European Entrepreneurship Research
Edited by David Smallbone, Hans Landström and Dylan Jones-Evans
Chapter 5: Switching from Paid Employment to Entrepreneurship: The Effect on Individuals’ Earnings
5. Switching from paid employment to entrepreneurship: the effect on individuals’ earnings Miguel Torres Preto, Rui Baptista and Francisco Lima INTRODUCTION The role played by the characteristics and preferences of individuals, as well as general and specific human capital in determining whether individuals choose wage employment or self-employment, has been addressed by some key theoretical and empirical works in the discipline of economics (Lucas, 1978; Kihlstrom and Laffont, 1979; Evans and Leighton, 1989a; Blanchflower and Oswald, 1998; and Lazear, 2005). While theoretical models highlight differences in expected earnings as the main factor determining the decision, empirical evidence does not provide clear support that earnings differentials play a significant (or, at least, the most significant) role in the choice between these two occupations (Parker, 2004). Moreover, empirical evidence on earnings differentials between the self-employed and wage employees does not favour the former (Hamilton, 2000). The main objective of this chapter is to look at the pecuniary impact of becoming a business owner after being employed in a firm. We use data that allow us to observe individual and firm level effects on incomes simultaneously, thus avoiding misspecification problems associated with panel studies that only include personal data. We account for multiple determinants of wage earnings, such as individual attributes (age, education), employer characteristics (firm size, economic sector, and administrative region), and individuals’ career paths. In line with labour economics research, while estimating individual earnings, we estimate different types of earnings models, each including different kinds of information concerning wage determinants. We...
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