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Does entrepreneurship actually make financial sense?

The average self-employed American earns less than her salaried peer, but new research adds a wrinkle. Either way: Running a business means so much more.

Students perform "hiphoponomics" in fall 2017, programming to introduce students to entrepreneurship and economics concepts. (Technical.ly File Photo)

A hundred young creatives listened attentively to a panel discussion at a networking event for college students. Each panelist shared a piece of career advice: Two encouraged entrepreneurship. Then it was time for me — the founder-journalist whose career has been dedicated to telling entrepreneurs’ stories — to speak.

“Honestly,” I said, “maybe consider a day job.”

Simple as it may seem, scholars for years have debated a straightforward question: Why do entrepreneurs do what they do? The risks are well-documented, so researchers drifted to a related question: Does the average entrepreneur earn more than their peers?

Do entrepreneurs earn more?

Way back in 2000, an influential paper confidently answered “no,” projecting that median earnings for an entrepreneur were depressed by a third over the course of a decade. This month, a new working paper argues something very different — that “self-employed individuals have significantly higher average income and steeper, more persistent income growth profiles than their paid-employed peers with similar characteristics.”

Lots of factors go into the debate. For many years, academic research didn’t distinguish the self-employed (like the 1 in 3 Americans in the freelance economy) from those growing businesses with employees, which traditionally corresponds with higher earnings. Also, contrary to the narrative, entrepreneurs aren’t always entrepreneurs. Plenty of people dip in and out of business ownership — spinning up a consultancy, serving as an independent hairdresser or operating an ecommerce shop for a spell — and then return to salaried employment. The data could be cloudy, too: As much as half of small businesses may underreport their earnings, according to one analysis.

Put it all together and adjusted for education, on average, self-employed Americans earn less than their peers. But the “self-employed” category is too broad to mean much. For example, a different analysis showed that average earnings for a sample of entrepreneurial Americans were higher than salaried workers, but the median was lower — because a few earned a lot but most earned very little. Those venture capital-backed software founder-CEOs are outliers when set against the ridesharing drivers and construction day laborers.

Once you only consider incorporated businesses that are more likely to have employees, entrepreneurs do fare better. More to the point, the “returns to entrepreneurship” are best understood by also incorporating gains other than financial ones, according to a 2014 paper, like fulfillment and learning. On the whole, self-employment is an effective, if merciless, life coach.

Will I make more money working at startups?

This logic is the same for startup employees — who also face depressed lifetime earnings. On average, jobs at companies with 50 or fewer employees pay less than bigger industry peers, according to past research — with the biggest discount at companies with five or fewer workers. In addition to the high failure rate of startups, a 2021 paper argued, most of that earnings gap is because small-firm employees tend to develop fewer work relationships than those at big companies. Averages aren’t destinies though.

A talented professional can rationally join a small or new company that she believes in, especially for a role that expands her network. Employee ownership models are proliferating, but your equity-based compensation can go nowhere if your company fails.

Not all jobs created by entrepreneurs are created equally, as a 2019 paper noted. Taking an ill-fitting role at a crummy startup will dent your lifetime earnings and well-being, but, as other research has demonstrated, accepting less upfront earnings for future growth can be a smashing success.

Put another way, small and new companies make up for lower wages in other ways: Flexibility, learning and future growth. Taking an early job at a tiny company is a risk like starting that same company.

The upside

The risks and rewards, though, remain concentrated with the founders: reputational, financial and more. One 2013 paper demonstrated that many employers were biased against job applicants who had previously run their own businesses. One reason acqui-hires have grown as a hiring strategy.

No wonder researchers have often also asked why anyone starts a company. Turns out it’s more often a personality type rather than a financial strategy. According to a 2016 paper, when compared to non-founders, entrepreneurs were more likely to have shown in high school a higher propensity toward both creative problem-solving and “disruptive behavior.”

Starting a company or working at a startup, then, is a risk best suited for those who want it. What advice will I give to my own kids? Explore entrepreneurship early and often, and pursue what makes you happy. Otherwise, as I told that group of young creatives, try the day job.

Technically Media CEO Chris Wink’s Builders newsletter features tips on growing powerful teams and dynamic workplaces. Sign up to get more pieces like this in your inbox before they appear on our site.

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