Yes, entrepreneurs play the leading role in driving economic growth. But they also face the risk of major losses when their ideas don’t work. Jennifer Alsever highlights in the latest issue of Fortune magazine one reason the benefits of entrepreneurial risk are likely to outweigh the costs.
According to a paper by finance professor Gustavo Manso of the University of California at Berkeley, self-employment does, in fact, pay off—often in the form of higher wages when the person returns to work at another company. “You don’t need to be crazy to be entrepreneurial,” says Manso, who holds the school’s William A. and Betty H. Hasler Chair in New Enterprise Development. “There’s a reasonable payoff.”
Manso analyzed the earnings of more than 5,000 Americans between 1979 and 2012, using data from the U.S. Bureau of Labor Statistics. They showed that the typical person makes less as an entrepreneur than he could earn at a bigger company. Most of those people go back to salaried jobs after two years or less—and that’s where it gets interesting.
People who had been self-employed at one point in their career did better financially compared with people who hadn’t, according to Manso’s research. Those who tried and abandoned entrepreneurship after less than two years weren’t punished financially when they moved to another employer. And those who lasted more than two years as entrepreneurs ended up earning 10% to 20% more than their peers.
“Big companies are willing to pay more because they believe they’ll get more bang for their buck,” says John Reed, senior executive director at IT staffing firm Robert Half Technology. In just the past few years he has seen increased demand for entrepreneurial recruits, especially among large companies.
Former business owners often bring a broad set of skills gained from handling multiple problems, moving fast, and getting things done with limited resources. Says Reed: “Big companies need that different way of thinking.”
