A new study from Iowa State shows that more education increases entrepreneurship in the US, especially for women.
Economics professor John Winters and graduate student Kunwon Ahn co-authored a paper recently published in the Small business economics.
“The benefits of education are often discussed.” “Some worry that this is mostly about signaling rather than skill development, but our study provides evidence that additional years of education after high school can encourage self-employment in high-growth industries,” Winters said.
To build their economic model, the researchers relied on the US Census Bureau’s American Community Survey. Ahn and Winters examined employment and education data for nearly 8.2 million people born in the US between 1963 and 1990. They then matched their samples by state and year of birth to relate changes in educational attainment to changes in self-employment rates.
The researchers categorized industries as “high growth,” “low to medium growth,” and “shrinking” based on data on industry employment growth between 2006 and 2019 from the U.S. Bureau of Labor Statistics’ quarterly Census of Employment and Wages.
“Some of the high-growth industries are what we would expect: e-commerce and computer and data processing services.” But they also included childcare, veterinary services and newer sub-industries in health, education and social services that emerged with smartphones and the explosion of apps,” Winters said.
Food processing, transportation, and grocery stores were among the low- to medium-growth industries. Automobiles, electronics and other manufacturing sectors dominated the shrinking industry category, along with some retailers selling clothing, movies and music.
After analyzing the numbers, the researchers found:
- Additional schooling led to more self-employment in high-growth industries for both men and women.
- Additional schooling led to more self-employment in low- to medium-growth industries for women, but not for men.
- Additional schooling led to less self-employment in shrinking industries for men. The researchers could not draw any definitive conclusions about women’s self-employment declining in the industry because the results were not statistically significant.
“Essentially, more education shifted the total number of self-employed men from declining and low- to medium-growth industries to high-growth industries.” “For women, more education increased overall self-employment,” Winters said.
Han Solo’s confidence
As for possible explanations for the different effects education has on men and women, Winters said it may have to do with self-confidence.
“The percentage of companies that fail early is very high. So budding entrepreneurs need to be confident to make the leap into self-employment,” Winters said. “Think of Han Solo in Star Wars saying, ‘Never tell me the odds.’ He is a textbook case of an overconfident entrepreneur.”
Winters pointed to previous research showing that men historically tend to be more confident, and even overconfident, compared to women. Along with increasing skills, education can help open doors and aspirations.
“Education empowers. For men who are overconfident, additional schooling may not do much for their confidence, but it can provide skills that will help them in more productive and high-growth industries. For women, education can have an even greater impact on encouraging them to jump into entrepreneurship by increasing their confidence in addition to their skills,” Winters said.
Data limitations and future research
One of the challenges of the research project was the measurement of entrepreneurship. The American Community Survey asks people if they are self-employed, which Winters said is not necessarily the same as being an entrepreneur.
“We tend to think of an entrepreneur as someone who wants to grow his business and has employees.” “Self-employment is broader,” Winters said.
To further shed light on this, the researchers looked at whether respondents who were self-employed had a business that was incorporated or not. Incorporating a business limits the owner’s personal liability for business debts. It provides legal protection, but comes with additional paperwork and fees.
Because businesses with more employees or growth aspirations are more likely to be involved, researchers have used legal status as a proxy for entrepreneurship. They found that education increased inclusive self-employment for both women and men.
To have large enough sample sizes for each state between 1963 and 1990, the researchers used data on the employment and education of non-Hispanic white adults.
“Our empirical method only allows us to look at people born in the United States, and we need large comparable groups for our approach to produce accurate results,” Winters explained.
Winters said he would like to see more research that explores how education can improve entrepreneurship overall and for different demographics.
“Education and entrepreneurship are very important topics, and a better understanding of how they work together is critical to a prosperous future,” notes Winters. “Our work only scratches the surface, but we hope that future research will shed light on things like the impact of college, student debt and where entrepreneurs start their businesses.”