Direction: Read the passage given below and answer the questions that follow:
Entrepreneurship isn’t usually worth the risk, some research says, at least strictly in financial terms. Thankfully, plenty of people take the plunge anyway, because they’re drawn to it for other reasons, such as wanting to be their own boss, or wanting to pursue a personal passion.
But that conventional view is misleading, argues a recent paper by Gustavo Manso at the University of California, Berkeley. Instead, he finds that self-employment does pay off financially, but not in the way entrepreneurs might expect. The financial benefit doesn’t usually come from the entrepreneurship itself, but in the form of higher wages when the entrepreneur returns to the workforce.
Research in this area typically compares salaried workers to those working for themselves; the latter group tends to make less, on average, after controlling for factors like level of education, hence the finding that entrepreneurship isn’t worth it financially.
Instead of that approach, Manso looked at workers over a longer time period, capturing the earnings of more than 5,000 American adults between 1979 and 2012. The average annual earnings for a self-employed person in the sample is higher than for a salaried worker, while the median is lower. That squares with previous research, and with intuition: a small number of entrepreneurs will make a lot of money, but the typical entrepreneur will make less than they could at a bigger company.
However, according to Manso’s data, most entrepreneurs eventually go back to salaried work; just over half of self-employment _______ last for two years or less.
When Manso looked at lifetime earnings, he found that individuals who had been self-employed at one point in their career fared better, when compared to similar workers who hadn’t. “Individuals who attempt to be employees but abandon entrepreneurship in less than two years are not punished, achieving approximately the same earnings as similar individuals who have not attempted to be entrepreneurs,” he reports in the paper. “At the same time, entrepreneurs who stay longer than two years, make substantially more than similar salaried workers.”
“Overall,” he concludes, “I find that entrepreneurs earn approximately 10% more than salaried workers with similar characteristics.”
Manso’s theory of why people might try entrepreneurship and then head back to the labor market just a year or two later hinges on experimentation. Stepping away from a job to start a company offers a chance to experiment with a new idea, and to see if it works or not. If the idea works, the entrepreneur stays self-employed; if the idea doesn’t work, they get another job.
The data can’t explain why that next job pays as much or more than the entrepreneur would have made if they’d never been self-employed. “It seems that the labor market values the experience [of being] self-employed,” said Manso by email. “Maybe the skills developed during [a] self-employment spell are useful as [a] salaried worker.”
