No. 209

November 2001

Earnings Growth among Disadvantaged Business Owners

by Robert W. Fairlie. 2001 [67] pages.

University of California at Santa Cruz.

under contract SBAHQ-00-M-0596

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Purpose

Many policy initiatives exist in the United States and

other countries to promote business formation, especially among economically disadvantaged or unemployed individuals. These programs take the form of

training, mentoring, or a variety of financial assistance plans. This study examines how the earnings

growth of self-employed workers who are lessskilled and disadvantaged compares to that of wageand salary-earning workers who are also less-skilled

and disadvantaged. In effect, this study seeks to

assess the merits of business promotion policies.

Scope and Methodology

The data used in this study are drawn from a nationally representative sample cohort of individuals who

were between 14 and 22 years of age in 1979. These

data—the National Longitudinal Survey of Youth

(NLSY)—-span the years 1979 through 1998. The

initial size of the sample was nearly 13,000 young

men and women, although there has been some attrition over the years.

Most of the study’s analysis of earnings and earnings-growth differentials between self-employed and

wage/salary workers are based on men and women

who have completed 12 years of formal education or

fewer and worked 1,400 or more hours per year. No

educational parameter was imposed for blacks and

Hispanics, however. The study excludes observations

from two supplementary NLSY samples of youths

enlisted in the military and economically disadvantaged non-black, non-Hispanic young men and

women.

The data analyses presented in this study consist

of descriptive tabulations and graphics, as well as

results from longitudinal regression equations. The

results of most data analyses are broken out into

three racial groups (black, Hispanic, and non-black,

non-Hispanic) and gender.

Highlights

Given that the empirical findings presented in this

study are broken out into six categories of race and

gender, they cannot be comprehensively recapitulated here. Instead, this summary highlights the more

notable results. Note that, with the exception of

blacks and Hispanics, all findings pertain to young

men and women who have completed no more than

12 years of formal education.

• Self-employed men made an average of $12,000

per year more than men employed in wage/salary

jobs (in 1998 dollars). After controlling for observed

worker/job characteristics, self-employed men still

accrued almost $10,000 more than their wage/salary

counterparts.

• Self-employed women made about $2,500 more

per year, on average, than their wage/salary counterparts both before and after controlling for relevant,

observed characteristics.

• For both men and women, the variance in annual

earnings was greater among the self-employed than

among wage/salary workers.

• Self-employed men and women experienced

slower annual earnings growth relative to their wage/

salary counterparts for the first few years, but their

earnings grew faster after a critical number of years.
• The average annual earnings of self-employed

blacks and Hispanics were substantially lower than

those of non-black, non-Hispanics.

• For black men, there was no statistically significant difference in earnings growth between the selfemployed and wage/salary workers.

• Self-employed Hispanic men had much lower

initial earnings but experienced much higher earnings-growth rates than their wage/salary counterparts.

• The sample size for minority women was very

small and yielded no notable findings.

Conclusions

Several countries, including the United States, have

implemented programs to encourage entrepreneurship. In many instances, these programs target economically disadvantaged demographic groups whose

prospects in the labor market are lackluster. This

study set out to assess how average earnings and

earnings growth differ between the self-employed

and wage/salary workers, and how these differences

vary by race and gender.

The study generally found that initial mean earnings and earnings growth rates were lower among the

self-employed, a pattern that later reverses itself after

a critical number of years. However, for blacks, there

were no systematic earnings-related patterns between

self-employed and wage/salary workers. In short,

policymakers who advocate the promotion of entrepreneurial activity as an alternative to wage/salary

work should, as a general proposition, not expect

immediate positive results, particularly for black

men.

Ordering Information

The complete report is available online at

www.sba.gov/advo/research. Copies are also available from:

National Technical Information Service

U.S. Department of Commerce

5285 Port Royal Road

Springfield, VA 22161

(703) 487-4650, (703) 487-4639 (TDD)

www.ntis.gov

Order number: PB2002-101029

Price codes: TBA