Business Ownership versus Self‐Employment

• Published date: 01 July 2018
• Author: Audrey Light,Robert Munk
• DOI: http://doi.org/10.1111/irel.12213
• Date: 01 July 2018

Business Ownership versus Self-Employment*

AUDREY LIGHT and ROBERT MUNK

Using data from the 1979 National Longitudinal Survey of Youth (NLSY79), we

find that 68 percent of jobs classified as self-employment are not independently

reported as self-owned businesses, while 16 percent of self-owned businesses are

not independently classified as self-employment. Businesses not regarded as self-

employment are often associated with such signs of entrepreneurship as self-iden-

tification as an entrepreneur, job descriptions that refer to business ownership or a

managerial role, and high individual skill/asset levels. Self-employed jobs that are

not independently classified as self-owned businesses are dominated by contract

work and home-based, single-person pursuits. Our evidence suggests that self-

employment should not be viewed as a synonym for business ownership.

Introduction

A noteworthy feature of the “economics of entrepreneurship”literature is

the lack of consensus on how to conceptualize and measure entrepreneurship.

At a theoretical level, Knight (1921), Schumpeter (1934), Lucas (1978), Kihl-

strom and Laffont (1979), and Lazear (2005) are among the studies offering

alternative definitions of entrepreneurship. In the empirical literature, analysts

have argued that the two most widely used proxies for entrepreneurship—busi-

ness ownership and self-employment—are problematic because they potentially

exclude nascent entrepreneurs while including activities that do not necessarily

entail risk, growth, and innovation (Carland et al. 1984; Henrekson and Sanan-

daji 2014; Hurst and Pugsley 2011; Levine and Rubinstein 2013; Parker

2009). Despite this definitional debate, self-employment is the proxy of choice

for entrepreneurship because it is widely available in microdata—and examples

*The authors’affiliations are, respectively, Ohio State University, Columbus, Ohio. E-mail: light.20@

osu.edu; and U.S. Census Bureau, Washington, DC. E-mail: robert.o.munk@census.gov. The authors thank

seminar participants at the Ewing Marion Kauffman Foundation and attendees at the Fourth SOLE/IELE World

Meetings in Montreal (June 2015) and the NLS 50th Anniversary Conference in Washington, DC (September

2015) for helpful comments.

INDUSTRIAL RELATIONS, DOI: 10.1111/irel.12213, Vol. 57, No. 3 (July 2018).

©2018 Regent s of the Univers ity of Calif ornia Published by Wiley Periodicals, Inc., 350 Main Street,

Malden, MA 02148, USA, and 9600 Garsington Road, Oxford, OX4 2DQ, UK.

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abound of analysts using the terms self-employment, business ownership, and

entrepreneurship interchangeably.

1

In this study we focus on an overlooked, but important, part of the puzzle

by asking whether analysts are justified in assuming that self-employment and

business ownership are synonymous. To answer this question, we use data

from the 1979 National Longitudinal Survey of Youth (NLSY79) to determine

whether survey respondents who identify their jobs as self-employment inde-

pendently classify those same jobs as self-owned businesses, and vice versa.

Over the more than 37 years that the NLSY79 has been in progress, respon-

dents have contemporaneously identified virtually every job as self-employ-

ment (or not) by answering standard “class of worker”questions. In 2010,

respondents identified each business owned since age 18, and most of their

reported businesses were subsequently linked by survey staff to previously or

contemporaneously reported jobs.

2

This unique feature of the data allows us to

assess the level of “agreement”between self-employment and business owner-

ship.

Among workers observed from (approximately) age 18 to 50, we find that

(1) self-employed jobs outnumber self-owned businesses by a factor of 2.3; (2)

16 percent of businesses are not classified as self-employment; (3) an astound-

ing 68 percent of self-employment is not identified as business ownership; and

(4) even among the incorporated self-employed (labeled “entrepreneurial busi-

ness owners”by Levine and Rubinstein [2013]), 30 percent of jobs are associ-

ated with neither business ownership nor reported business income.

In addition to assessing the level of “agreement”between independent

reports of self-employment and business ownership, we exploit a rare opportu-

nity to view verbatim descriptions of the work performed on each job. We use

this information to characterize subsamples of jobs classified as “only”self-

employment, “only”a self-owned business, or both self-employment and a

business. We find that owners of businesses not identified as self-employment

are more likely than others (even the incorporated self-employed) to use such

terms as “I own the business”or “I run the business”when describing the type

1

For example, in the abstract of his seminal article based on an analysis of self-employed workers,

Hamilton (2000) writes (italics added): “The empirical results suggest that the nonpecuniary benefits of self-

employment are substantial: Most entrepreneurs enter and persist in business despite the fact that they have

both lower initial earnings and lower earnings growth than in paid employment ...”Other analysts who use

self-employment, business ownership, and/or entrepreneurship interchangeably include Evans and Jovanovic

(1989), Evans and Leighton (1989), Blanchflower and Oswald (1998), Dunn and Holtz-Eakin (2000), Fairlie

(2002), Ekelund et al. (2005), Ahn (2010), and Levine and Rubinstein (2013).

2

The fact that businesses reported in 2010 are successfully linked to jobs reported as far back as 1978—

plus the fact that business ownership is a significant event that should be easily recalled after many years—sug-

gests that recall bias is not an important issue. We pursue this issue later in the article.

436 / AUDREY LIGHT AND ROBERT MUNK

of work they perform. Incorporated business owners also have higher skill

levels and asset levels than do any other “type,”including the incorporated

self-employed. At the other extreme, we find that self-employment not identi-

fied as business ownership often entails contract work (including sales, substi-

tute teaching, acting, and even working as a church pastor) and home-based,

one-person pursuits such as babysitting, dog walking, and handyman work.

Our analysis demonstrates that survey respondents do not view self-employ-

ment and business ownership as synonyms. Before referring to the self-

employed as business owners (or to business owners as self-employed), analysts

should be aware of these striking discrepancies in self-classification.

Entrepreneurship is an elusive construct, but the evidence suggests that it is more

likely to be found among individuals who explicitly claim to be business owners

than among those who identify their jobs as self-employment.

Background

A number of analysts have questioned whether business ownership or self-

employment is a suitable proxy for entrepreneurship. Carland et al. (1984)

advocated distinguishing between owners of small businesses and entrepre-

neurs. Following Schumpeter (1934), they defined entrepreneurship as the act

of carrying out “new combinations of means of production”(Carland et al.

1984: 354). They argued that small businesses are not always innovative,

growth-oriented, or entrepreneurial, while large business owners are likely to

qualify as entrepreneurs. In a similar vein, Henrekson and Sanandaji (2014)

argued that small business owners (whom they equate with the self-employed)

should not be viewed as entrepreneurs because they rarely introduce innova-

tions, hire employees, or grow their businesses. Hurst and Pugsley (2011) pro-

vided a wealth of evidence suggesting that small businesses rarely conform to

notions of entrepreneurship. For example, they demonstrated that relatively

few small business owners claim to have started their business to offer a new

product or service, or express an expectation of or desire for growth and

innovation.

Turning to self-employment, Berglann et al. (2011: 180) claimed that “a

self-employed person is obviously an entrepreneur”insofar as he/she works

for the firm (unlike an investor) while bearing considerable income risk (unlike

a wage employee). Nonetheless, they objected to equating sole proprietorship

with entrepreneurship on the grounds that the definition of entrepreneurship

should be expanded to include employed owners of limited liability companies

who, like the self-employed, work for their own firms while bearing income

risk. In a different vein, Levine and Rubinstein (2013) advocated restricting

Business Ownership versus Self-Employment / 437