The returns to education for opportunity entrepreneurs, necessity entrepreneurs, and paid employees

• Published in: Economics of education review Vol. 37; pp. 66 - 84
• Main Authors: Fossen, Frank M., Büttner, Tobias J.M.
• Format: Journal Article
• Language: English
• Published: Elsevier India Pvt Ltd 01-12-2013
• Subjects: Entrepreneurship; Human capital; Productivity; Rate of return; Salary wage differentials; Productivity; L26; Human capital; I20; Entrepreneurship; Rate of return; J31; J23; J24; Salary wage differentials
• ISSN: 0272-7757; 1873-7382
• DOI: 10.1016/j.econedurev.2013.08.005

•The returns to education are similar for opportunity entrepreneurs and employees.•Necessity entrepreneurs have 3%-points lower returns to education.•Pooled estimates hide this heterogeneity, which leads to misguided conclusions.•The results may explain Europe–US differences in entrepreneurial returns.
We assess the relevance of formal education on the productivity of the self-employed, distinguishing between opportunity entrepreneurs, who voluntarily pursue a business opportunity, and necessity entrepreneurs, who lack alternative employment options. We expect differences in the returns to education between these groups due to different levels of control over the use of their human capital. The analysis employs the German Socio-Economic Panel and accounts for the endogeneity of education and non-random selection. Results indicate that the returns to a year of education for opportunity entrepreneurs are similar to the paid employees’ rate of 8.8%, but 3 percentage points lower for necessity entrepreneurs. Pooling the two types of entrepreneurs tends to understate the value of education for opportunity entrepreneurs and may spark misguided hopes concerning necessity entrepreneurs. The results may also partly explain Europe/US differences in average entrepreneurial returns.