For years now, economists have struggled with a confusing piece of data: Salaried workers tend to make more than those who are self-employed, which doesn't square with our perception of entrepreneurs as risk-takers who put everything on the line for considerable economic returns. That category sweeps titans of industry like Bill Gates --innovators who create growth and more jobs -- in with your average hot dog vendor. While the instincts and work ethic may be similar, the range of economic success is enormous.
In a new paper for the National Bureau of Economic Research, U.C. Berkeley's Ross Levine and Yona Rubinstein of the London School of Economics decided to break the "self-employed" into two groups: those who run limited liability incorporated businesses and those who are unincorporated (perhaps in a sole proprietorship or joint venture). Using a longitudinal survey of 12,686 people born between 1957 and 1964, they found the incorporated crowd is much more markedly different from the salarymen and women, both in earnings and background traits. Notably: The stereotype of the bad-boy entrepreneur is very much a real thing. (Which means Bill Gates, who smoked pot and dropped out of Harvard, is thoroughly typical)
What characterizes these entrepreneurial types? They are relatively:
- High-rolling: Using standard controls for education and experience, the average incorporated, self-employed person makes 48 percent more than somebody on salary.
- Experienced: Entrepreneurs don't start out successful. Most spend some time as salaried workers before launching their own venture.
- White: Eighty-four percent of the incorporated self-employed in the survey sample are white, compared with 71 percent of white people in the sample overall.
- Male: Only 28 percent of the incorporated self-employed are female.
- Educated: Forty-six percent of the incorporated self-employed have a college degree, compared with 32 percent of salaried workers.
- Privileged: Despite the Horatio Alger stereotype, entrepreneurs are more likely to have come from money. A $100,000 increase in family income corresponds with an almost 60 percent increase in the probability of forming a corporation, after applying relevant controls, suggesting that the availability of seed capital may play a role. Children of better educated parents also appear to be more entrepreneurial.
- Rebellious and smart: The longitudinal survey gave participants a battery of questions about drug and alcohol use, delinquency and criminal behavior, creating an "Illicit Activity Index." Those who scored above average on both the Index and an intelligence test developed for the military were 60 percent more likely to fall among the incorporated self-employed. "This mixture of learning aptitude and 'break-the-rules' behavior is tightly linked with entrepreneurship," the authors write.
The demographic characteristics of entrepreneurs -- the whiteness, the maleness, the moneyed backgrounds -- should be cause for concern, since those benefits tend to be self-perpetuating. The "break-the-rules" factor might be encouraging, since it could theoretically apply to anybody. The problem is, poorer non-whites who smoke pot and get arrested are more likely to end up in jail, which makes it hard to dream up new business ventures.