5/4/21: The Entrepreneurship Boom: Forced, Voluntary and Funded

 

My recent article for The Currency covering the ongoing global developments in entrepreneurship: The US is experiencing an entrepreneurship boom. So, what is going wrong in Ireland?: https://thecurrency.news/articles/40790/the-us-is-experiencing-an-entrepreneurship-boom-so-what-is-going-wrong-in-ireland/

13/7/19: A New Era of Entrepreneurship? Not in Data so Far...

We are living in the Great New Era of Entrepreneurship that started in 2013 (according to someone at Forbes) and the academia is pumping high entrepreneurship training and education (the Golden Era, according to some don from Stanford). Living in all of this 'game changing' stuff around you can be daunting, inducing FOMO and other behavioural nudges toward dropping everything and launching that new unicorn doing something disruptive and raking in the miracle dollars that everyone around you seems to be minting out of thin air. Right?

Well, not so fast. Here's the data from the U.S. - that 'super-charged engine of enterprising folks':

Hmm... anyone can spot the 'New Era' in entrepreneurship out there, other than the one with historically low rates of business creation?

21/5/19: 'Popping up everywhere' or not? Entrepreneurship and start ups

Much has been written, taught and said about the New Age of Entrepreneurship and the new generations of entrepreneurs, allegedly springing up across the modern economies. The problem is, for all the marketing hype and academic programs enthusiasm, entrepreneurship (new business formation) is actually running pretty low.

Here is the U.S. data on new business formation:

While other data, e.g. Kauffman Foundation, shows relatively stable and even higher rates of entrepreneurship over recent years, much of this data aggregates both incorporated and non-incorporated businesses, including sole traders and self-employed. This is reflected in the fact that entrepreneurship rates in recent years have been sustained solely by a massive increase in entrepreneurship uptake by individuals with less than high school education and of older age cohorts:

Source: https://indicators.kauffman.org/wp-content/uploads/sites/2/2019/02/2017-National-Report-on-Early-Stage-Entrepreneurship-February-20191.pdf

Over the same time, cohorts with higher education have seen a decrease in their entrepreneurship rates, driven in part by their rising share of population, their rising numbers, and, well, yes, lower incentives to undertake entrepreneurial risks.

Now, as to the age of entrepreneurs we have.

Source: https://indicators.kauffman.org/wp-content/uploads/sites/2/2019/02/2017-National-Report-on-Early-Stage-Entrepreneurship-February-20191.pdf 

In  summary, the above table shows that the rates of entrepreneurship amongst the Millennials have declined, the rates for GenX-ers (35-44 cohort) have risen, but are quite volatile, with significant increases (2009-2010) associated with greater involuntary entrepreneurship (high unemployment), while overall increases in entrepreneurship have ben sustained by entrepreneurs of ages 45 and older.

So, to that often repeated popular and academist 'truism' of the New Age of Entrepreneurship and the great entrepreneurial spirit of the younger generations... errr, not quite.

Note: caveats notwithstanding, good data on the subject is available here: https://www.kauffman.org/currents/2019/02/indicators-provides-early-stage-entrepreneurship-data.

1/10/18: Irish Times on Enterprise Ireland Venture Capital Programs

Recent article in the Irish Times looks at some of the industry views on entrepreneurship in Ireland and Enterprise Ireland funding programs. Some of the comments included are from myself.

Link: https://www.irishtimes.com/business/innovation/phelan-decries-scattergun-approach-to-seeding-foreign-start-ups-1.3639788.

8/4/18: U.S. economy: entrepreneurship is not 'the new thing' outside Academia

These days, every business school on every university campus is sporting a burgeoning post-graduate program in Entrepreneurship. And this trend is driven by the perceived - and often hyped up by the media and by business futurists - rise in entrepreneurship in the modern society. Apparently, allegedly, an increasing proportion of today's business students want to start their own businesses (despite the fact the vast majority have never worked in a start-up and have no expertise to run one). The new dynamism of the economy, the college-to-start up model of business education, the 'can do' attitude (or aspirations) are all part and parcel of the mythological creature that is the New Economy.

In reality, of course, brutally put, there is no evidence of rising demand for entrepreneurship. And, worse, in fact, there has been a dramatic decline in entrepreneurial rates in the U.S. economy:

Source: http://rooseveltinstitute.org/wp-content/uploads/2018/03/Powerless.pdf.

Now, consider the two data series above, together: firm entry (new firms creation) and firm exist rates. As the blue line trended down, rapidly, without a pause, the green line remained relatively flat. Which means that the ratio of entries to exits has fallen over the time, pretty dramatically. In the 1970s and 1980s, firms entries had, on average been more frequent and less likely to be associated with higher firm exits. In the 1990s,  both relationship deteriorated. In the 2000s, both literally went down the drain.

So as the rate of new businesses additions went down, the rate of old businesses exiting did not change that much. So much for dynamism and for 'entrepreneurial spirits' of the young. The start ups mythology is strong. But the reality of the U.S. economy is that of concentration, market power, monopolization and decline of entrepreneurship. Funny thing, how Silicon Valley propaganda works, right?

How do we know the bit about monopolization? Why, look at profit share of output:

Still want to build up that 'entrepreneurship program' in the University? Because students want to learn about starting their own businesses? Should you really think twice?

8/4/18: Talent vs Luck: Differentiating Success from Failure

In their paper, "Talent vs Luck: the role of randomness in success and failure", A. Pluchino. A. E. Biondo, A. Rapisarda (25 Feb 2018: https://arxiv.org/pdf/1802.07068.pdf) tackle the mythology of the "dominant meritocratic paradigm of highly competitive Western cultures... rooted on the belief that success is due mainly, if not exclusively, to personal qualities such as talent, intelligence, skills, efforts or risk taking".

The authors note that, although "sometimes, we are willing to admit that a certain degree of luck could also play a role in achieving significant material success, ...it is rather common to underestimate the importance of external forces in individual successful stories".

Some priors first: "intelligence or talent exhibit a Gaussian distribution among the population, whereas the distribution of wealth - considered a proxy of success - follows typically a power law (Pareto law). Such a discrepancy between a Normal distribution of inputs, suggests that some hidden ingredient is at work behind the scenes."

The authors show evidence that suggests that "such an [missing] ingredient is just randomness". Or, put differently, a chance.

The authors "show that, if it is true that some degree of talent is necessary to be successful in life, almost never the most talented people reach the highest peaks of success, being overtaken by mediocre but sensibly luckier individuals."

Two pictures are worth a 1000 words, each:

Figure 5 taken from the paper shows:

• In panel (a): Total number of lucky events and
• In panel (b): Total number of unlucky events 

Both are shown as "function of the capital/success of the agents"

Overall, "the plot shows the existence of a strong correlation between success and luck: the most successful individuals are also the luckiest ones, while the less successful are also the unluckiest ones."

Figure 7 shows:
In panel (a): Distribution of the final capital/success for a population with different random initial conditions, that follows a power law.
In panel (b): The final capital of the most successful individuals is "reported as function of their talent".

Overall, "people with a medium-high talent result to be, on average, more successful than people with low or medium-low talent, but very often the most successful individual is a moderately gifted agent and only rarely the most talented one.


Main conclusions on the paper are:

• "The model shows the importance, very frequently underestimated, of lucky events in determining the final level of individual success." 
• "Since rewards and resources are usually given to those that have already reached a high level of success, mistakenly considered as a measure of competence/talent, this result is even a more harmful disincentive, causing a lack of opportunities for the most talented ones."

The results are "a warning against the risks of what we call the ”naive meritocracy” which, underestimating the role of randomness among the determinants of success, often fail to give honors and rewards to the most competent people."

17/5/16: Village May 2016: Buzz Wrecked

My article for Village magazine highlighting some longer-term risks for the Irish economy: http://villagemagazine.ie/index.php/2016/05/buzz-wrecked/.

Plenty of opportunities to the upside, but risks are material and require careful policy balancing between fiscal prudence, institutional supports for domestically-anchored companies and entrepreneurs, with a concerted effort to move away from the FDI-or-bust policies of the past 30 years.

18/4/16: Taxing 1%?.. Make My Day...

An interesting paper on the dynamics of income inequality from Xavier Gabaix, Jean-Michel Lasry, Pierre-Louis Lions and Benjamin Moll (December 2015, CEPR Discussion Paper No. DP11028: http://ssrn.com/abstract=2714268).

Take in the abstract alone for key conclusion:

“The past forty years have seen a rapid rise in top income inequality in the United States. While there is a large number of existing theories of the Pareto tail of the long-run income distributions, almost none of these address the fast rise in top inequality observed in the data. We show that standard theories, which build on a random growth mechanism, generate transition dynamics that are an order of magnitude too slow relative to those observed in the data. We then suggest two parsimonious deviations from the canonical model that can explain such changes: "scale dependence" that may arise from changes in skill prices, and "type dependence," i.e. the presence of some "high-growth types." These deviations are consistent with theories in which the increase in top income inequality is driven by the rise of "superstar" entrepreneurs or managers.”

So the key to alleviating inequality increases (if the key were to be found in income / wealth tax territory so frequently inhabited by socialstas) is not to tax all high earners, but to tax the very left tail of the high earners’ distribution, or so-called “"superstar" entrepreneurs or managers”. It’s not a 1% tax, nor a tax on wealth (capital), nor a tax on “anyone earning more than EUR100,000” (the latter being commonly bandied around the countries like Ireland), that is a panacea. It is, rather, a tax on Zuckerbergs and Bloombergs, Bezoses and Ellisons et al.

Which, sort of, means taxing exactly those who create own wealth, rather than inherit it from mommy or daddy… Perverse? If it is the “high-growth types” that are the baddies, not the Rothschilds or the Kochs who inherited wealth, at fault, then the entrepreneurs should be taken out and fiscally shot.

And if you do, here’s what you will be fiscally shooting at: innovation (see http://www.nber.org/papers/w21247). The linked paper conclusion: “our findings vindicate the Schumpeterian view whereby the rise in top income shares is partly related to innovation-led growth, where innovation itself fosters social mobility at the top through creative destruction”.

Dust out that ‘tax the 1%’ argument, again… please.

24/1/16: Unobserved Ability and Entrepreneurship

Yesterday, I posted some links relating to non-Cognitive Skills, contextualising these into the Gig-Economy related issues. Here is another interesting study relating to human capital and linking unobserved (and hard to measure) ability to entrepreneurship.

From the policymakers' and indeed investors and other market participants perspective, the question of why do some individuals become entrepreneurs is a salient one.

Identifying the causal relationships between external conditions, systems and policy environments, as well as behavioural and other drivers of entrepreneurship is of great value for setting policies and systems for enhancing the rate of entrepreneurship creation in the economy. A recent paper, titled "Unobserved Ability and Entrepreneurship" by Deepak Hegde and Justin Tumlinson (Ifo Institute at the University of Munich, April 20, 2015) attempts to answer to key questions surrounding the formation of entrepreneurship, namely:

1. Why do individuals become entrepreneurs? and
2. When do they succeed? 

The authors "develop a model in which individuals use pedigree (e.g., educational qualifications) as a signal to convince employers of their unobserved ability. However, this signal is imperfect…" So far - logical: upon attaining a level of education, and controlling for quality of that education (complexity of degree programme, subject matter, quality of awarding institution, duration of studies, attainment of grades etc), a graduate acquire more than a sum of knowledge and skills attached to the degree. They also acquire a signal that can be communicated to their potential employer that conveys they lateen (hidden) abilities; attitude toward work, aptitude, ability to work in teams, ability to work on complex systems of tasks etc.

Problem is - the signal is noisy. For example, a graduate with 4.0 GPA from a second tier university can have better potential abilities than a graduate with 3.7 GPA from a first tier ranked university. But that information may not be clearly evident to the potential employer. As the result, there can be a large mismatch between what an applicant thinks their ability is and what their CV signals to the potential employer.

In the paper, theoretical model delivers a clear cut outcome (emphasis mine): "…individuals who correctly believe their ability is greater than their pedigree conveys to employers, choose entrepreneurship. Since ability, not pedigree, matters for productivity, entrepreneurs earn more than employees of the same pedigree."

The authors use US and UK data to test their model prediction (again, emphasis is mine): "Our empirical analysis of two separate nationally representative longitudinal samples of individuals residing in the US and the UK supports the model’s predictions that

• (A) Entrepreneurs have higher ability than employees of the same pedigree, 
• (B) Employees have better pedigree than entrepreneurs of the same ability, and 
• (C) Entrepreneurs earn more, on average, than employees of the same pedigree, and their earnings display higher variance."

Point C clearly indicates that entrepreneurs earn positive risk premium for effectively (correctly, on average) betting on their ability over their pedigree. In other words, the take chance in themselves and, on average, win. The real question, however, is why exactly do their earnings exhibit higher variance - is it due to distributional effects across the entrepreneurs by their ability, or is it due to risk-adjusted returns being similar, or is it due to exogenous shocks to entrepreneurs incomes (e.g. tax system-induced or contractually-structured)?

These are key questions we do not yet address in research sufficiently enough to allow us to understand better what the Gig-Economy and entrepreneurship in modern day setting imply in terms of aggregate consumption, investment, household investment and decision making by entire household in terms of labour supply, educational choices (for parents and children), etc.

As some might say... it's complicated...

14/1/16: Push or Pull: Entrepreneurship Among Older Households

Recently, I highlighted some of the potential problems relating to the less stable nature of the Gig Economy employment, including the longer-term pressures on life-cycle savings and pensions, as well as health care provision (you can see my discussion here: http://trueeconomics.blogspot.ie/2015/12/71215-cx-future-of-work-summit-dublin.html and my slides here: http://trueeconomics.blogspot.ie/2015/11/111115-gig-economy-challenge.html.

Mainstream economics has been lagging behind this trend, with little research on the long-term sustainability of the Gig Economy employment. Thus, it is quite heartening to see some related, albeit tangentially, research coming up.

One example is a very interesting study on entrepreneurship amongst the U.S. older households. Weller, Christian E. and Wenger, Jeffrey B. and Lichtenstein, Benyamin and Arcand, Carolyn, paper titled "Push or Pull: What Explains Growing Entrepreneurship Among Older Households?" (November 30, 2015: http://ssrn.com/abstract=2697091) does what it says: it looks at both push and pull factors for entrepreneurship and self-employment amongst older households.

Per authors (italics are mine): "Older households need to save more money for retirement, possibly by working longer. [Which is a pull factor for self-employment and  entrepreneurship]. But, the same labor market pressures that have made it harder for people to save, such as increasingly unstable labor markets, have also made it more difficult for people to work longer as wage and salary employees. [Which is a push factor toward self-employment and entrepreneurship].

Self-employment hence may have become an increasingly attractive alternative option for older households.

Entrepreneurship among older households has indeed grown faster than wage and salary employment, especially since the late 1990s.

But, this growth, rather than reflecting rising economic pressures, may have been the result of growing financial strengths – fewer financial constraints and more access to income diversification through capital income from rising wealth. Our empirical analysis finds little support for the hypothesis that growing economic pressures have contributed to increasing entrepreneurship. Instead, our results suggest that the growth of older entrepreneurship is coincident with increasing access to income diversification, especially from dividend and interest income. We also find some tentative evidence that access to Social Security and other annuity benefits increasingly correlate with self-employment. Greater access to interest and dividend income follows in part from more wealth and improved access to Social Security may reflect relatively strong labor market experience in the past."

This is an interesting result, because it is based on older households' access to:

1. Income from savings and wealth, including assets wealth; and
2. Income from retirement.

In the Gig Economy, both are likely to be compressed due to higher income volatility (and thus rising precautionary savings), tax incidences that impose liability with a lag (inducing higher income uncertainty), and lower earnings (due to lack of paid vacations, maternity/paternity and sick leave). In some cases, e.g. countries like Ireland, there is also an explicit income tax penalty for the self-employed (via both lower standard deductions and higher tax rates, such as those under the USC). All of which implies reduced access to income from retirement in the future, lower savings and wealth (including through inheritance). 

Subsequently, the current cohort of older entrepreneurs and self-employed may exhibit exactly the opposite drivers for their post-retirement employment choices than today's younger cohorts. And that matters because entrepreneurship and self-employment that start with push factors (e.g. necessity of life and constraints of the labour markets) is less successful than entrepreneurship and self-employment that start with pull factors.

22/10/15: Gig Economy and Human Capital: Evidence from Entrepreneurship and Self-Employment

In a couple of weeks, I will be speaking about the role of human capital in the emergence of the new economy at the CXC Corporate event “Globalization & The Future of Work Summit” in Dublin.

Without preempting what I am going to say, here are some key points of interest.

Human capital-centric growth is overlapping, but distinct from the so-called “Gig Economy”, primarily because of the different definition of what constitutes two respective workforces.

Take, for example, the U.S. data. Based on research by the American Action Forum by Rinehart and Gitis (2015) we can define three types of the broadly-speaking “Gig Economy” workers: “For our most narrow measurement of gig workers (labeled Gig 1) we simply include independent contractors, consultants, and freelancers. Our middle measurement (Gig 2) includes all Gig 1 workers plus temp agency workers and on-call workers. Our broadest measurement (Gig 3) includes all Gig 2 workers plus contract company workers.”

The respective numbers engaged in three categories in 2014 range between 20.5 million and 29.7 million with growth rates over the recent years outpacing economy-wide jobs expansion rates across all categories of the Gig Economy workers.

Still, the key problem with identifying underlying trends in the development of the Gig Economy is the lack of data on specifics of occupational choices of the self-employed individuals and the relationship between these choices and human capital held by the Gig Economy participants relative to the traditional employees.

To see the indicators of links between the Gig Economy and human capital, we have to look at the more established literature concerning transition to entrepreneurship.

One interesting set of studies here comes from the Italian Survey of Household Income and Wealth (SHIW), a large biannual household survey conducted by the Banca d’Italia. A 2007 paper by Federici, Ferrante and Vistocco looked at the links between institutional structures, technological innovation and human capital in determining the propensity to transition from employment to entrepreneurship. Looking at the general literature on the subject, the authors state that “…institutions are more important than technology (i.e., technological specialization and/or industry composition) in fostering or restricting entrepreneurship and that the interactions between institutions and occupational choices may be complex and non linear”. The authors caution against directly linking self-employment rates with entrepreneurship rates, as “countries displaying the same self-employment rates, might be endowed with very different amounts and qualities of entrepreneurial skills devoted to innovation and business ventures (or, on the other hand, they might not)”.

To better pinpoint the link between entrepreneurship, self-employment and the institutional and technological drivers for risk taking, Federici, Ferrante and Vistocco augment the survey data with a set of variables describing the social and institutional environment in which self-employed and traditional workers are operating. Crucially, “in addition to standard indexes of economic and social infrastructure at the local level, [the authors] include a measure of creativity developed by Florida (2004).”

The conclusions are strong: “in Italy, both institutional and technological factors have shaped entrepreneurial opportunities requiring, tacit knowledge embedded in social networks and in the cultural background of families… Hence, well-educated people lacking privileged access to tacit knowledge and, in particular, an appropriate family background, could find themselves up against a considerable barrier to entrepreneurship and occupational mobility.” In simple terms, the Gig Economy-related value added can and should be considered within the context of family and cultural institutions as much as technological enablement environment.

As per traditional metrics of human capital, the study conclusions appear to be contradicting the core literature on entrepreneurship. “The evidence of the highly significant negative role of education in entrepreneurial selection is very strong in comparison with the majority of international studies showing that education has either a positive impact (Blanchflower, 1998) or a statistically non-significant effect on occupational choices”. In other words, formal education seems to be more conducive to employment choices in traditional environments (e.g. full time jobs),w it exception, perhaps, of professional skills-based activities.

The negative links between education and propensity to engage in entrepreneurial activity is, however, in line with other Italian study based on the same data, authored by Sabatini (2006).

However, U.S. data-based studies frequently find existence of a U-shaped relationship between income and propensity to transition to self-employment, with highest propensities concentrated around low income earners and high income earners, while lower propensities occurring for middle income earners. One recent example of this evidence is Moutray (2007). In so far as formal education is an instrument for income, especially for sub-populations excluding very high income earners, this suggests that the negative relationship between self-employment and education found in the case of Italy can be culturally conditioned and does not translate to other economies.

Another interesting aspect of transition to the ‘Gig Economy’ relating to the links between human capital and creativity or cultural institutions was uncovered by a 2011 paper by Mitra and Abubakar who looked at data from the Local Authority Districts of Thames Gateway South Essex (TGSE) in East of England. The study attempted “to explore and identify key determinants of business formation in Knowledge Intensive sectors (which include the creative industries) of regions outside the major metropolitan conurbations, and their possible differences with other Non-Intensive Sectors.”

The authors found that human capital is “positively correlated with new business entry in Knowledge intensive sectors”, but at the same time, it is “negatively correlated with new startups in non-knowledge intensive sectors”. Per authors: “This finding suggests that while entrepreneurship in knowledge based and creative industries requires highly skilled labour, in non knowledge based industries, low skilled labour is the primary determinant of new firm creation. Our findings also appear to suggest the need for higher skills/educated base in order to boost the growth of new businesses” in high knowledge-intensity sectors.

Werner and Moog (2009) use data from the German Socio-Economic Panel (SOEP) to map out significant linkages between entrepreneurial learning (and entrepreneurial human capital) and the probability of transition from traditional employment to self-employment. One interesting aspect of their findings is that learning-by-doing occurring (in their sample) during tenure of working for an SME has positive impact on ability to transition to entrepreneurship, confirming similar findings from other European countries. This also confirms findings that show that working for SMEs results in more frequent exits into self-employment and that such exits more frequently result in transition to full entrepreneurship than for self-employment entered from employment in larger firms.

The learning-by-doing effect of pre-transition experience for starting entrepreneurs and self-employed is also confirmed by the UK study by Panos, Pouliakas and Zangelidis (2011) who looked at the self-employment transition dynamics for individuals with dual job-holding and the links between this transition and human capital and occupational choice between primary and secondary jobs. The study used a wide (1991-2005) sample of UK employees from the British Household Panel Survey (BHPS). The authors investigated, sequentially, “first, the determinants of multiple job-holding, second, the factors affecting the occupational choice of a secondary job, third, the relationship between multiple-job holding and job mobility and, lastly, the spillover effects of multiple job-holding on occupational mobility between primary jobs.” The findings indicate that “dual job-holding may facilitate job transition, as it may act as a stepping-stone towards new primary jobs, particularly self-employment.” An interesting aspect of the study is that whilst the major effects are present in the lower skilled distribution of occupations, there is also a significant and positive effect of dual-jobs holding on transition to self-employment for professional (highly skilled) grade of workers.

Finally, there is a very interesting demographic dimension to transition to self-employment, explored to some extent in the U.S. data by Zhang (2008). The paper focused on the topic of elderly entrepreneurship. The author conjectures that in modern (ageing) demographic setting, “the “knowledge economy” could elevate the value of elderly human capital as the “knowledge economy” is less physically demanding and more human-capital- and knowledge-based.” Zhang (2008) largely finds that professional, skills-based self-employment and entrepreneurship amongst the older generations of workers can act as an important force in reducing adverse impact of ageing on modern economies.


The common thread connecting the above studies and indeed the rest of the vast literature on entrepreneurship, self-employment and transition from traditional employment to more projects-based or client-focused forms of engagement in the labour markets is increasingly shifting toward the first type of the ‘Gig Economy’ engagement. This typology of the ‘Gig Economy’ is becoming more human capital and skills-intensive and is better aligned with the ‘knowledge economy’ and the ‘creative economy’ than ever before. In simple terms, therefore, the ‘Gig Economy’ not only reaches deeper than the traditional view of the shared services (Uber et al) growth trends suggest.

While both increasing in importance and broadening the set of opportunities for economic development, the modern ‘Gig Economy’ is presenting significant challenges to social, cultural and policy norms that require swift addressing. These challenges are broadly linked to the need to Create, Attract, Retain and Enable key human capital necessary to sustain long term development and growth of the ‘Gig Economy’.

With that, tune in to my talk at the CXC Corporate event “Globalization & The Future of Work Summit” (link: http://cxccorporateservices.com/cxc-future-of-work/) in few weeks time for the details as to what should be done to put global ‘Gig Economy’ onto the sustainable development and growth track.


Sources:

Will Rinehart, Ben Gitis, “Independent Contractors and the Emerging Gig Economy” July 29, 2015,

Federici, Daniela and Ferrante, Francesco and Vistocco, Domenico, "On the Sources of Entrepreneurial Talent in Italy: Tacit vs. Codified Knowledge" (July 24, 2007)

Sabatini, Fabio, "Educational Qualification, Work Status and Entrepreneurship in Italy: An Exploratory Analysis" (June 2006). FEEM Working Paper No. 87.2006

Velamuri, S. Ramakrishna and Venkataraman, S., "An Empirical Study of the Transition from Paid Work to Self-Employment". Journal of Entrepreneurial Finance and Business Ventures, Vol. 10, No. 1, pp. 1-16, August 2005

Moutray, Chad M., "Educational Attainment and Other Characteristics of the Self-Employed: An Examination Using Data from the Panel Study of Income Dynamics" (December 11, 2007). Hudson Institute Research Paper No. 07-06.

Mitra, Jay and Abubakar, Yazid, "Entrepreneurial Growth and Labour Market Dynamics: Spatial Factors in the Consideration of Relevant Skills and Firm Growth in the Creative, Knowledge-Based Industries" (August 23, 2011). University of Essex CER Working Paper No. 1.

Werner, Arndt and Moog, Petra M., "Why Do Employees Leave Their Jobs for Self-Employment? – The Impact of Entrepreneurial Working Conditions in Small Firms" (November 1, 2009).

Panos, Georgios A. and Pouliakas, Konstantinos and Zangelidis, Alexandros, "Multiple Job Holding as a Strategy for Skills Diversification and Labour Market Mobility" (August 23, 2011). University of Essex CER Working Paper No. 4.

Zhang, Ting, "Elderly Entrepreneurship in an Aging U.S. Economy: It's Never Too Late" (September 8, 2008). Series on Economic Development and Growth, Vol. 2.

2/10/15: The plight of Irish self-employed and our backward economic policies

This is a copy of the Business Retail Union of Ireland public letter sent to the Minister for Social Protection regarding equal treatment of the self-employed in Ireland:

Source: @brui_ie

The key questions raised in this letter are other questions of great importance to this country for a number of reasons are:

1. Per latest CSO data there were 327,500 self-employed persons in Ireland in 2Q 2015, constituting 16.9 percent of total employment in the country. The number of self-employed persons is roughly comparable to the current counts of people on Live Register (332,000). Which means these are hardly ‘negligible’ or ‘small’ numbers. What is being done to make sure these people have access to basic, normal, civilised levels of representation in the economic and social system that is, allegedly, modern Ireland?
2. Self-employed people in Ireland face upfront tax penalty for their activities in terms of higher rates of taxation and higher cost of tax compliance. Why? Where is the balance between proportionality of taxation and representation?
3. Self-employed people in Ireland have no access to basic social protection benefits that PAYE workers can avail of. Why? Where is the balance between social services access based on need vs access based on privilege of arbitrary categories of employment?
4. Self-employed people in Ireland have no access to basic training and jobs activation schemes that PAYE workers can avail of. Why? Again, per (3) above, where is that balance?
5. Self-employed people in Ireland are discriminated against in access to state pensions. Same questions as in (4).
6. Self-employed people in Ireland have to deal with huge degree of income volatility with our tax system inducing more uncertainty in their after-tax income than PAYE workers. Why is that the financial markets operate on a basic principle of risk premium, whilst markets for human capital operate on the basis of risk penalty?
7. Self-employed people in Ireland have no basic supports in terms of annual holidays, sick leave, family leave, etc and are often placed at severe disadvantage compared to some PAYE and public sector workers in terms of jobs-related benefits. Which, of course, is understandable, but reinforces the point made in (6) above.

Many of the above differences cannot (and probably should not) be removed by state policies (e.g. (7)). Others can. None have been removed and no one - in our leadership establishment - appears to, frankly put, give a damn.

However, the reality of modern workforce is that:

• Self-employment is going to rise dramatically in the future as our economy moves further and further along the lines of developing skills, professional occupations employment and a ‘gig’-economy. In simple terms, global economy is becoming more and more self-employment intensive and Ireland can’t avoid the same fate, no matter how ignorant our policymakers remain;
• The recent decline (on pre-crisis trend) in self-employment is driven by the sheer mass of economic activity destruction in Ireland since the onset of the Global Financial Crisis, highlighting the extreme nature of jobs and income security volatility faced by the self-employed;
• Self-employment is set to expand in the future as we become more entrepreneurial and intrapreneurial.

If anything, current penalty to the self-employed should not only be erased, but reversed, due to higher risk nature of their work, they deserve a risk premium, not a risk penalty in the markets.

It is high time we gave a thought as to how on earth can we continue developing an entrepreneurial modern, human capital-based economy whilst penalising starting entrepreneurs and people taking risk deploying their skills through self-employment. Bragging about ‘entrepreneurial Ireland’ and ‘knowledge economy’ at international venues can’t get us anywhere, if we fail to first reform ourselves. The mentality of civil service ‘jobs-for-life’ entitlement culture that dominates our policy formation has to change. Good starting point - addressing the above issues for the self-employed.

25/5/15: Immigration and Entrepreneurship: Major Unknowns

A recent CESIfo study looked at the role of immigrants in driving entrepreneurship.

Per authors: "Immigrants are widely perceived as being highly entrepreneurial and important for economic growth and innovation. This is reflected in immigration policies and many developed countries have created special visas and entry requirements in an attempt to attract immigrant entrepreneurs. Not surprisingly, a large body of research on immigrant entrepreneurship has developed over the years."

Couple of interesting statistical summaries:

 Striking feature of the above data is low level of entrepreneurship within Indian and Philippines diasporas.

Key conclusions are: "Overall, much of the existing research points towards positive net contributions by immigrant entrepreneurs. The emerging literature on these contributions as measured by innovations represents the most convincing evidence so far."

Interestingly, distribution of entrepreneurship across educational categories, as exemplified above, is rather uniform, although this does not adjust for quality of entrepreneurship.

Caveats are: "First, there is little evidence in the literature on how much immigrant-owned businesses contribute to job growth. Although data exists on employment among immigrant-owned businesses no data are available showing the dynamics of employment among these firms."

Second, "...immigrant business owners are more likely to export, but we know little about how much they export in total dollars and how many jobs are created by these expanded markets for selling goods and services."

Lastly, there is indeterminacy as to the "....the contribution of immigrant businesses to diversity. Although the contribution of immigrant firms to diverse restaurants, merchandise and services is apparent in any visit to a major U.S. city, we know less about the contribution to diversity in manufacturing and design of innovative products."

Full paper can be read here: Fairlie, Robert W. and Lofstrom, Magnus, Immigration and Entrepreneurship (April 23, 2015). CESifo Working Paper Series No. 5298: http://ssrn.com/abstract=2597992

18/2/15: A Tale of Two Capitalisms & Economics Education

A recent paper by Bennett, Daniel L., titled "A Tale of Two Capitalisms: Perilous Misperceptions About Capitalism, Entrepreneurship, Government, and Inequality" (December 11, 2014, http://ssrn.com/abstract=2537118) examined "two widely held perceptions about capitalism, challenging the popular view that capitalism is a villainous perpetuator and government a saintly corrector of cronyism and inequality".

Much of this erroneous view has been driven by the fallout from the Global Financial Crisis, the Great Recession and the Euro Debt Crisis, although those of us who lived through it face-to-face would note the obvious error in this paradigm when it comes to expectations about the Government role.

As authors note, "this characterization is largely driven by misperceptions. Capitalism is viewed as a system that favors the elite at the expense of everyone else (crony capitalism), rather than one that promotes economic liberty and opportunity for all (free market capitalism). The state is meanwhile viewed as a benevolent and omniscient corrector of market failures and provider of public goods (romantic view of politics), rather than a political system operated by agents whose actions may reflect their own self-interest and not the welfare of the general public (public choice view). These misperceptions result in not only a distorted understanding of the institutional structure that underlies capitalism and the mechanism in which income is distributed, but also lead to perilous reform prescriptions that undermine free market capitalism and generate unintended consequences that act to reduce individual and societal well-being."

The paper shows how "institutions that constrain the discretionary authority of government incentivize productive entrepreneurship and facilitate free market capitalism, giving rise to a natural or market determined income distribution and opportunity for economic mobility." In other words, markets do work, when markets are allowed to work. On the other hand, "institutions that do not sufficiently constrain the authority of government incentivize unproductive entrepreneurship and facilitate the development of crony capitalism, resulting in structural inequality and little opportunity for economic mobility." In other words, markets don't work when they are prevented from working.

As per empirical evidence, the author concludes that:

"This tale of two capitalisms provides insights about the connection between institutions, entrepreneurship, and the desirability of income inequality. Empirical evidence suggests that sound monetary institutions and legal institutions that protect private property rights and enforce the rule of law provide an environment favorable for free market capitalism and productive entrepreneurship, as well as promote greater economic development and less income inequality. This tends to support
Milton Friedman’s (1980) famous proclamation: ““A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”"

"A growing body of evidence and the theory advanced here suggests that the development and preservation of institutions supportive of free market capitalism is the best way to facilitate productive entrepreneurship, economic development, economic mobility, and a distribution of income that, while unequal, is determined by merit rather than political ties, and is lower than that which exists in less capitalistic economies."

As per sources of the public misconceptions about capitalism in its various forms, "The scarcity of public choice and institutional analysis in mainstream economics education has contributes to widely held misperceptions about capitalism, entrepreneurship, government, and inequality. An analysis by FIke and Gwartney (2014) finds that only half of the 23 most common economic principles textbooks provide any coverage of public choice topics and that the coverage of market failure is sextuple that of government failure. The economics profession must do a better job of educating students and the public about the nuanced but vital distinction between the varieties of capitalism, and the important role of institutions in constraining the Hobbesian propensity of man to “rape, pillage, and plunder” and enabling the Smithian proclivity of man to “truck, barter, and exchange”
(Boettke, 2013)."

4/1/2015: Homeownership, House Prices and Entrepreneurship

Two papers on related topics, the link between enterprise formation and homeownership/mortgages. In the past, I wrote quite a bit about various studies covering these, especially within the context of negative equity impact of reducing entrepreneurship and funding for start ups.

In the first paper, Bracke, Philippe and Hilber, Christian A. L. and Silva, Olmo, "study the link between homeownership, mortgage debt, and entrepreneurship using a model of occupational choice and housing tenure where homeowners commit to mortgage payments."

The paper, titled "Homeownership and Entrepreneurship: The Role of Mortgage Debt and Commitment" (CESifo Working Paper Series No. 5048: http://ssrn.com/abstract=2519463) finds that, from theoretical model perspective, "as long as mortgage rates exceed the rate of interest on liquid wealth [short-term bonds, deposits etc - and this usually is the case in all markets]:

1. mortgage debt, by amplifying risk aversion, diminishes the likelihood that homeowners start a business; 
2. the negative relation between mortgage debt and entrepreneurship is more pronounced when income volatility is higher; and
3. the relation between housing wealth and entrepreneurship is ambiguously signed because of competing portfolio and hedging considerations. 

Empirical analysis by the authors "confirm these predictions. A one standard deviation increase in leverage makes a homeowner 10-12 percent less likely to become an entrepreneur."

So back to negative equity. Negative equity is significantly increasing leverage taken on by the borrower. For example: original mortgage with LTV of 75% set against property price decline of 10% generates leverage increase of 8.3 percentage points. In Irish case, same mortgage (in Dublin case) brought back to current valuations of the property from the peak prices pre-crisis implies a leverage increase of, roughly, 50 percentage points, which is, roughly an increase of 12 standard deviations.


The second study is by Jensen, Thais Laerkholm and Leth‐Petersen, Søren and Nanda, Ramana, titled "Housing Collateral, Credit Constraints and Entrepreneurship - Evidence from a Mortgage Reform" (CEPR Discussion Paper No. DP10260: http://ssrn.com/abstract=2529930). The paper looks at "how a mortgage reform that exogenously increased access to credit had an impact on entrepreneurship, using individual-level micro data from Denmark."

The authors find that "a $30,000 increase in credit availability led to a 12 basis point increase in entrepreneurship, equivalent to a 4% increase in the number of entrepreneurs. New entrants were more likely to start businesses in sectors where they had no prior experience, and were more likely to fail than those who did not benefit from the reform."

What does this mean? "Our results provide evidence that credit constraints do affect entrepreneurship, but that the overall magnitudes are small. Moreover, the marginal individuals selecting into entrepreneurship when constraints are relaxed may well be starting businesses that are of lower quality than the average existing businesses, leading to an increase in churning entry that does not translate into a sustained increase in the overall level of entrepreneurship."

So the study basically shows that mortgage credit constraints in Denmark are not highly important in determining the rate of successful entrepreneurship. But the study covers only intensive margin constraints - in other words it covers credit availability increases over and above normal operating credit markets. This does not help our understanding of what happens in the markets where credit constraints are severe. 

17/8/2014: Disruptive Innovation, Experimentation and Entrepreneurship

Last week I highlighted several studies relating to human capital and entrepreneurship. Here, continuing with the theme, couple more.

First, a paper by Acemoglu, Daron and Akcigit, Ufuk and Celik, Murat Alp, titled "Young, Restless and Creative: Openness to Disruption and Creative Innovations" (February 1, 2014, MIT Department of Economics Working Paper No. 14-07: http://ssrn.com/abstract=2392109). Per authors: the study argues that "openness to new, unconventional and disruptive ideas has a first-order impact on creative innovations" where such innovations are defined as those "that break new ground in terms of knowledge creation". The problem, of course, is not that this is something new - if anything, this is trivial - but that we (as society and managerial systems, firms, enterprise ownership structures etc) have a very hard time managing disruptive innovation to achieve 'openness' to the ideas and the generators of such ideas that deliver true disruption.

"After presenting a motivating model focusing on the choice between incremental and radical innovation, and on how managers of different ages and human capital are sorted across different types of firms, we provide cross-country, firm-level and patent-level evidence consistent with this pattern. Our measures of creative innovations proxy for innovation quality (average number of citations per patent) and creativity (fraction of superstar innovators, the likelihood of a very high number of citations, and generality of patents). Our main proxy for openness to disruption is manager age. This variable is based on the idea that only companies or societies open to such disruption will allow the young to rise up within the hierarchy. Using this proxy at the country, firm or patent level, we present robust evidence that openness to disruption is associated with more creative innovations."

All of the above is fine. All is neat and well-argued and empirically backed. But, now, try and tell your average HR manager that the firm they work for should hire someone who breaks consensus and bends rules of logic, thinking and creativity?.. Or try telling them that standard CV/interview/test metrics they employ make hiring disruptive talent actually impossible, let alone difficult… And try telling them that majority of people graduating with 'right' degrees and offering 'right' references and credentials are actually deeply conformist, rather than disruptively innovative…



The second paper of interest is by Kerr, William R. and Nanda, Ramana and Rhodes-Kropf, Matthew, titled "Entrepreneurship as Experimentation" (July 28, 2014, Journal of Economic Perspectives: http://ssrn.com/abstract=2473226) argues that "…entrepreneurship is about experimentation: the probabilities of success are low, extremely skewed and unknowable until an investment is made." The most interesting bit in the above is the unknowable nature of the probability of success ex ante actual investment. This really cuts across the entire notion of angel financing…

"At a macro level experimentation by new firms underlies the Schumpeterian notion of creative destruction. However, at a micro level investment and continuation decisions are not always made in a competitive Darwinian contest. Instead, a few investors make decisions that are impacted by incentive, agency and coordination problems, often before a new idea even has a chance to compete in a market."

Another interesting issue is that the authors "contend that costs and constraints on the ability to experiment alter the type of organizational form surrounding innovation and influence when innovation is more likely to occur. These factors not only govern how much experimentation is undertaken in the economy, but also the trajectory of experimentation, with potentially very deep economic consequences."

The reason why it is go interest from my point of view is nine years ago, I tried to formulate some of these exact fundamentals in relationship between ability to take risks, experiment, innovate and the macro-economic policy environments in the paper available here: http://www.tcd.ie/Economics/TEP/2005_papers/TEP2.pdf

13/8/2014: The Dutch Entrepreneurial Ecosystem Paradox

Staying the course of the previous two posts, here is another interesting study relating to entrepreneurship, this time looking into policy supports dimension.

The paper by Stam, Erik, titled "The Dutch Entrepreneurial Ecosystem" (July 29, 2014, http://ssrn.com/abstract=2473475) looks at the entrepreneurial ecosystem "in the Netherlands: how it has evolved, why the rate of solo self-employment has increased and how the entrepreneurial ecosystem can be adapted to increase productive entrepreneurship." This is of interest well beyond the Netherlands, as many (all) European countries are pursuing development of such ecosystems and as many European countries have witnessed significant increases in the rates of individual self-employment (self-employment with no related employees).

The authors "summarize and extend the entrepreneurial ecosystem literature with a model that includes framework conditions (formal institutions, culture, physical infrastructure, and demand) and systemic conditions (networks, leadership, finance, talent, new knowledge, and support services) that affect entrepreneurial outputs (entrepreneurial activity) and outcomes indicating value creation (productivity, income, employment and well-being)."

Per authors: "The Netherlands has seen a remarkable rise of independent entrepreneurship in the last decade. However, this rise of independent entrepreneurship reveals to be predominantly a rise in solo self-employment, not an increase in growth oriented and innovative entrepreneurship."

This is a common problem to Ireland: "The rise of self-employment in the Netherlands seems to have lowered unemployment rates, but it is unlikely that the rise of self-employment and new firm formation has positively affected innovation and in the end productivity growth over the period 1987-2013."

But the Netherlands self-employment rise is also idiosyncratic in part: "This rise of self-employment and new firm formation and stagnation of innovation is what we label the Dutch Entrepreneurship Paradox. Especially favorable fiscal treatment of self-employed, and an increasing demand for flexible labor, stimulated the growth in the number of solo self-employed since the early 2000s. There is a major policy task not to let entrepreneurship be a driver of productivity decline (or at best a flexible belt in the labor market), but to stimulate productive entrepreneurship instead." It is worth noting that in the majority of European countries, the solo self-employment is actually penalised via tax systems, rather than supported, as in the Netherlands.

On the policy front, to "increase productive entrepreneurship in the Netherlands, we propose four policy actions. Each action addresses a change in one of the four framework conditions of the entrepreneurial ecosystem:

• Changing formal institutions to enable labor mobility (development and circulation of talent); 
• Opening up public demand for entrepreneurs, to provide finance for new knowledge creation and application; 
• Stimulating a culture of entrepreneurship and entrepreneurial leadership; 
• Adapting or creating physical infrastructure to enhance knowledge circulation and networks."

12/8/2014: Experience, Earnings & differences Between Economies

In the previous post, I summarised recent research paper on entrepreneurial learning-by-doing (http://trueeconomics.blogspot.it/2014/08/1082014-serial-entrepreneurship.html). Here are some other recent papers on the topic of entrepreneurship and human capital.

First paper is by Lagakos, David and Moll, Benjamin and Porzio, Tommaso and Qian, Nancy, titled "Experience Matters: Human Capital and Development Accounting" (December 2012, CEPR Discussion Paper No. DP9253: http://ssrn.com/abstract=2210223). The authors use micro-level data from 36 countries to look at evolution (over time) of ratios of experience-to-earnings. They find that the ratios profiles are flatter in poor countries than in advanced economies. In other words, experience-linked returns are flatter in poorer economies, or put differently: for each year gained in experience, poor country workers gain less in earnings than their rich countries counterparts.

The paper does not aim to explain the reasons for this empirical regularity, though the authors do say that "…composition differences [of workers (e.g., by schooling attainment or sector of work)] explain very little of the cross-country differences in the steepness of experience-earnings profiles. …Amongst other possible explanations, we note that our main finding that experience-earnings profiles are flatter in poorer countries is consistent with a class of theories in which TFP and experience human capital accumulation are complementary (i.e., low TFP in poor countries depresses the incentives to accumulate human capital)."

What the authors do, however, is look at the role that differences in experience-earnings profiles found between countries can have on levels of development. "When the country-specific returns to experience are interpreted in such a development accounting framework -- and are therefore accounted for as part of human capital -- we find that human and physical capital differences can account for almost two thirds of the variation in cross-country income differences, as compared to less than half in previous studies."

Specifically, on human capital side, "We calculate the part of human capital due to experience and show that this is positively correlated with income, and furthermore that its cross-country dispersion is similar in magnitude to the dispersion of human capital due to schooling."

In the forthcoming article in the Village magazine, I challenge Thomas Piketty's interpretation of income and wealth inequality data, in part, on the grounds of his failure to reflect the role of human capital in generating financial returns. It looks like the above study provides some more support for my arguments.

10/8/2014: Serial Entrepreneurship: Learning by Doing?

We often hear references to the U.S. entrepreneurial climate whereby one's failure at the first venture is commonly rewarded with an encouragement to start again. One of the alleged reasons for this climate emergence, the popular belief asserts, is that an entrepreneur learns from failure or success of the first venture to deploy this knowledge to achieve a greater success in the second entrepreneurial endeavour.

"Serial Entrepreneurship: Learning by Doing?" (NBER Working Paper No. w20312) by FRANCINE LAFONTAINE, and KATHRYN L. SHAW, looks are whether "Among typical entrepreneurs, is the serial entrepreneur more likely to succeed?" and "If so, why?"

The paper uses "a comprehensive and unique data set on all establishments started at any time between 1990 and 2011 to sell taxable goods and services in the state of Texas. An entrepreneur is defined as the owner of a new business. A serial entrepreneur is one who opens repeat businesses. The success of the business is measured by the duration over which the business is in operation."

And the conclusions are:

• "The data show that serial entrepreneurship is relatively uncommon in retail trade. Of the almost 2.3 million retail businesses of small owners of new businesses in our data, only 25 percent are started by owners who have started at least one business before, and only 8 percent are started by an owner who is still operating at least one other business started earlier."
• "However, once one becomes an entrepreneur for a second time, the probability of becoming one a third time, or fourth time, and so on, keeps rising."
• "Moreover, we find that an owner's prior experience at starting a business increases the longevity of the next business opened, and that controlling for person fixed effects, prior experience still matters."
• "Finally, experience at starting retail businesses in other sectors (e.g. a clothing store versus a repair shop) is beneficial as well, though not as much as same sector experience, and not in the restaurant sector."

The authors conclude that "prior experience imparts general skills that are useful in running the new business."

26/6/2014: Explaining the Gender Gap in Entrepreneurship

A new paper by Caliendo, Marco and Fossen, Frank M. and Kritikos, Alexander and Wetter, Miriam, titled "The Gender Gap in Entrepreneurship: Not Just a Matter of Personality" (May 23, 2014: CESifo Working Paper Series No. 4803 http://ssrn.com/abstract=2457841) tackles a very important and highly sensitive issue of gender gap in entrepreneurship.

The authors ask "Why do entrepreneurship rates differ so markedly by gender?"

The paper uses data from a large, representative German household panel, covering 2000-2009 period, to "investigate to what extent personality traits, human capital, and the employment history influence the start-up decision and can explain the gender gap in entrepreneurship."

"In contrast to previous research the main advantage of our data set is that it contains not only information on the socio-demographic background of the respondents, but also on a broad set of personality constructs that elicit the Big Five traits and several specific personality characteristics."

Note: Big Five Factor Model of personality (McCrae and Costa, 2008) "describes the personality by the factors openness to experience, conscientiousness, extraversion, agreeableness, and neuroticism (or, reversely, emotional stability)."

Per authors, "To the best of our knowledge information on the Big Five approach has not been used to assess the gender gap in entrepreneurship. We are the first to simultaneously analyse the effects of the Big Five factors, risk aversion, locus of control, and the ability to trust others ..., as well as of a variety of variables controlling for human capital, employment status, and other socio-demographic factors on the gender specific decision to enter self-employment."

The findings are very far-reaching and substantially in dispute with commonly held views:

1. "Applying a decomposition analysis, we observe that the higher risk aversion among women explains a large share of the entrepreneurial gender gap."
2. "We also find an education effect contributing to the gender difference." More specifically: "On average, working aged women in Germany are still less educated than men and are, therefore, less inclined to start a business."
3. "Thirdly, the current employment state has a strong effect into the opposite direction: If the share of women in wage employment were as high as the male share, holding everything else constant, their entry rate into self-employment would be much smaller."
4. "…we show that personality traits help explain the gender gap in nuanced ways. While specific characteristics, in particular risk attitudes, are able to explain a substantial amount of the gender gap, the overall influence of the Big Five personality constructs point to the opposite direction. This means that if women were endowed with the same scores in the Big Five as men, the gap would be even larger."

Overall: "the explained gap is therefore negative meaning that if women exhibited in all observable variables the same parameter values as men, the entry rate of women would be even smaller than actually observed."