Why do some people opt for self-employment while others seem content to work for someone else? Are people more likely to become entrepreneurs if they grow up in certain kinds of communities? Is entrepreneurship a trait like brown eyes that is passed down genetically through DNA? These are important questions for any entrepreneur who is considering handing over the reigns of the family business to their offspring someday.
Why is this important? Between 80-90% of all companies in North America are family owned businesses (FOB). FOB’s account for approximately 60% of all employment, 78% of all new jobs and 65% of all wages.
Here’s the bad news. By 2050, the primary owners of most FOBs will be retired or dead. Up to 42% have not yet chosen a successor. Many of these owners probably are wondering (or should be), “Will the kids be able to run the business after I’m gone?” The reality is that only 40% of FOBs survive to the second generation. Only 12% survive to the third generation. And only 3% survive to the fourth generation.
Now, here’s some good news. A new study just released last week by the Small Business Administration’s (SBA) Office of Advocacy offers empirical evidence of that early self-employment increases the likelihood of self-employment later. In case you are wondering, the Office of Advocacy of the U.S. Small Business Administration (SBA) advances the views, concerns, and interests of small business before Congress, the White House, federal agencies, federal courts, and state policymakers.
While there have been numerous studies of entrepreneurship in the past, this one is unique in that it looks at self-employment as a career trajectory, analyzing self-employment patterns within the context of life cycles, specifically the effect of early self-employment on later self-employment. The study’s confirmation of what one would suspect; that early exposure to self-employment increases the chances of self-employment later on is not so surprising, but, it went a lot deeper.
The study revealed that in addition to early exposure to self-employment, other factors such as education, family size, family income, net worth and employment history also influence self employment experiences during the early and mid-career years.
A Longitudinal Analysis of Early Self-employment in the National Longitudinal Surveys of Youth (NLSYs) was completed by Yasuyo Abe and Hannah Betesh, Berkeley Policy Associates and A. Rupa Datta, at University of Chicago. The researchers utilized data from two earlier studies; National Longitudinal Surveys of Youth; the 1979 Cohort (NLSY79) and the 1997 Cohort (NLSY97). The 1979 data provided the researchers with information on the early self employment experiences of a group of people born from 1960-1962. The 1997 data provided the researchers with information on the early self-employment experiences of a group of people born 20 years later between the years 1980-1982.
The researchers looked at the self-employment experiences of the two groups from age 14 to 41 and then analyzed the impact of demographic factors such as finances, personal and family backgrounds. They were looking for answers to the following questions:
- Does the level of self-employment over time vary due to individual and family characteristics and/or early labor-market experience?
- Do economic characteristics, measured in terms of income and net worth, alter the probability of self-employment?
- Are economic outcomes, such as income and net worth, affected by the extent of prior self-employment?
- Are there differential patterns of early self-employment among two generations of Americans born in the late twentieth century?
Here are some highlights from the research:
There are statistically significant differences as well as similarities in the self-employment experiences in those born between the years 1960-1962 and those born 20 years later between the years in 1980-1982.
A high correlation between self-employment experiences during ages 20-22 and self-employment later in life (ages 22-41) was found. The data proves that early exposure to self-employment increases the likelihood of self-employment during an individual’s early to mid-career years.
In addition, the data also showed the younger subgroup members in the NLSY97 cohort had much higher self-employment rates than the older subgroup members in the NLSY79 cohort when the two were compared by age 23.
Between the years 1979 and 1997, there were dramatic increases in self-employment for Blacks and Hispanics. There were also increases in female self-employment, but, not as much for Blacks and Hispanics.
Supporting the findings of previous self-employment studies, respondents who had ever been self-employed tended to be white males whose parents had higher levels of education than respondents who had never been self-employed. In addition, access to financial resources (family income and net worth) increased the likelihood of self-employment.
An interesting piece of data revealed that respondents who had ever been self-employed were more likely to have grown up in a rural area or on a farm than those who had no experience with self-employment.
Extended years of self-employment were positively correlated with individual and family income. In fact, even one more year of self-employment increased income and net worth significantly.
Conclusion
Data from NLSY97 confirmed that study respondents who were approximately 20 years younger (born from 1980 to 1982) are experiencing higher levels of self-employment compared to the experiences of individuals born 20 years earlier. This increase is attributed to higher levels of self-employment among minorities. Self-employment statistics for white males was the same for both groups.
Quite frankly, this research supports my belief that we need to do a better job of fostering and supporting entrepreneurship for the sake of our economy and our nation. In fact, I think we could do with a little more focus on early entrepreneurship training for our youth and a little less on extracurricular activities that have limited potential as a career path.
For every Brett Favre and Tiger Woods, thousands of kids are postponing viable careers while they nurse dreams of fame and fortune. Meanwhile, they could be spending some of the time they are investing in practice to study or work part time. Nothing prepares someone to enter the workforce better than working!
Of course, I realize that I may have incited a riot or at least the wrath of those parents and coaches who will argue that kids learn valuable lessons from sports like competing and teamwork. And, I’m not suggesting we throw sports out. I just wish would focus a little more on teaching kids about entrepreneurship. Maybe that’s because I’m a serial entrepreneur.
Actually, I had my first business when I was 12. My Dad was a school teacher and he would drive me to a nearby town and park. then I would get out and walk up and down the street selling advertising specialties while he sat in the car and graded papers. I would walk into a business in my Sunday-best suit (yes, at twelve years old I was already wearing business suits) and my prospects thought I was so cute, they just couldn’t say no to me. I ended up being the top sales person in the company and earned more money than my Dad!
Later on, when I got older, my prospects didn’t think I was so cute. Then, I had to learn some real selling skills. But, I never forgot what it felt like to sell something for more than it cost me and make a profit. From then on, I was hooked on entrepreneurship. In the video below, Cameron Herold, who began his first entrepreneurial venture at seven, shares his belief about the importance of teaching children how to be entrepreneurs.
What are your thoughts on early exposure to self-employment? What ideas do you have on how we could prepare our youth to fill the entrepreneurial shoes of their predecessors? If we succeed at this, by 2050, we’ll be enjoying a virtual renaissance of entrepreneurship and a return to economic health.
A full report of study results are detailed in, A Longitudinal Analysis of Early Self-employment in the National Longitudinal Surveys of Youth (NLSYs). For more information you can visit the Office of Advocacy website or call (202) 205-6533.
If you would like to contact me, you can do so by visiting my LinkedIn page or emailing me at mike.clough@bestbizpractices.org.
Posted by: Mike Clough
