Self-confidence and self-employment

Who decides to become self-employed? This can be an important question if one considers that entrepreurship is a major factor in economic growth, and entrepreneurs are largely self-employed. Ozkan Eren addresses this question using the US National Education Longitudinal Study data and comes to some surprising conclusions.

The extant literature has firmly established that wealth and the father's labor market choice are very important determinants in self-employment choices. And this seems to make sense: you need to be capable of overcoming financial hurdles and have a role model to follow. This literature neglected, however, the impact of cognitive and especially non-cognitive abilities. NELS data include measures at 8th and 12th grades like test scores, self-esteem and locus of control that Eren exploits here.

While it may not seem surprising that individuals with higher self-esteem tend to be more self-employed, but it is counter-intuitive that the impact of cognitive skills is negative. One can rationalize this, though, with the idea that high skills can be compensated with wages, and lower skilled people may find fewer opportunities on the labor market and work by themselves. Interestingly, the two abilities work rather independently, as only one fifth of the correlation between cognitive abilities and self-employemnt can be explained by non-cognitive abilities.

Americans stand out against Europeans because they exude self-confidence. This may explain why there are more entrepreneurs in the US and why income a higher, despite the fact that US test scores on abilities are lower.