Entrepreneurship as Status Seeking
Whether or not entrepreneurship “pays” is a recurring theme in academic research. Prior studies has compared entrepreneurs to similar employees, or examined income changes pre-post entrepreneurship, and in general tends to find negative effects of entrepreneurship for people’s income. The focus on the relationship between entrepreneurship and earnings however neglects theories that emphasize how one’s career choices reflect trade-offs between tangible and intangible benefits, both as consumption good (e.g. procedural utility) and as intangible investments (status enhancement). In this paper we approach entrepreneurship as both a consumption good and investment in status enhancement by drawing on the literature on status attainment. If occupational status (or prestige) is a central aspect of career attainment, then we must consider not only entrepreneurship’s financial consequences but, also, its status consequences.
Sociological research establishes that individuals do indeed value and willingly trade status for expected earnings. An extensive research program on status attainment casts the achievement of greater occupational status as an objective that motivates individuals to invest in their careers. Although earnings are generally increasing with occupational status, there is not always a clear financial earnings payoff to investing in status attainment, especially if work valued by a profession or occupation is not necessarily valued in labor markets. Consequently, many individuals make financial sacrifices to attain greater status. Successful entrepreneurs are often celebrated and accorded high social status. And research on new ventures suggests that founders and founding personnel take on specialized senior management titles like “Chief Executive Officer” or “Manager” that rank high in occupational prestige rankings.
We seek to advance the literature on entrepreneurship and social stratification by simultaneously considering the consequences of entrepreneurship for occupational status and earnings. We argue that wage reductions associated with entrepreneurship may be partially offset by enhanced occupational status that allows entrepreneurs to return to wage employment in more prestigious positions than those they left. Specifically, we propose that, relative to observationally-equivalent workers, entrepreneurs are more likely to change occupations and, subsequently, to experience increased occupational status.
We test these arguments by analyzing longitudinal data on the career histories of Swedish workers. The data offer comprehensive coverage of the populations of individuals and employing organizations, as well as information on employees’ career histories, including their employment status, income, and occupation. This allows us to measure returns on entrepreneurship in terms of both earnings and occupational status. We employ coarsened exact matching techniques (CEM) to estimate effects of entrepreneurship on subsequent earnings and occupational prestige. We first use CEM to identify individuals on observationally-equivalent career trajectories prior to some, but not all, transitioning to entrepreneurship. We then compare such entrepreneurs’ earnings and occupational statuses to employees in the matched sample.
We first replicate prior findings of an entrepreneurial wage penalty: the vast majority of individuals who enter entrepreneurship experience lower earnings after doing so than observationally-equivalent (including in wages) employees. However, the wage penalty is only part of the story. We also demonstrate that those who engage in entrepreneurship change occupations at higher rates than observationally-equivalent others who remain in employment. Moreover, many enhance their occupational status by doing so. In particular, those who leave employment to start an incorporated business are more likely to increase their occupational status than observationally-equivalent others who remain in wage employment or those who start unincorporated business. We continue to estimate the magnitude of this effect as well as the short, medium, and long-terms status implications of engaging in entrepreneurship.
An important contribution of our research is the insight that earnings are not the only returns to entrepreneurship; individuals appear to trade off earnings and status. Moreover, our study suggests that entrepreneurship offers many individuals a distinct path to upward mobility.