Self-Employment or Entrepreneurship

What are the implications of using self-employment as a proxy for entrepreneurship? At the McQuinn Center, we normally avoid using such measures. But this is primarily a result of our using other definitions of entrepreneurship than startups or business creation. Rather, we tend to use entrepreneurship in the imaginative sense, i.e. entrepreneurship as a fundamental component in the market and the entrepreneur as an imaginative change agent in the Cantillon-Knigh-Mises sense.

But even for those adhering to a definition of entrepreneurship that is more “standard” in the literature, it can be problematic to use self-employment as a proxy. This is shown in Tino Sanandaji‘s aptly titled paper Self-Employment Does Not Measure Entrepreneurship. Here’s the abstract:

This paper uses two newly assembled datasets to demonstrate that the common practice of relying on self-employment to proxy for entrepreneurship often gives rise to misleading inference. I determine the source of wealth of all billionaires listed on Forbes Magazine’s list, identifying 996 individuals in over fifty countries who became rich by founding new firms. Using these individuals to define the per capita rate of entrepreneurship, I show that entrepreneurship rates correlate negatively with self-employment rates. Countries with higher income, lower taxes and less regulation have higher entrepreneurship rates but less self-employment. I attempt to account for these results theoretically using a model where efficient financial markets and a favorable policy environment lead to a better allocation of capital to talent, higher wages, and thereby driving the least productive self-employed individuals to seek employment. This evidence is supplemented with data from a recently administered survey of 12,000 Swedish twins. The survey asks individuals to identify as self-employed or entrepreneurs based on their intentions to innovate and grow their businesses. Whilst the self-employed have lower incomes than employees with similar characteristics, entrepreneurs have higher incomes. These relationships hold both in the cross-section and within family.

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