Skip to main content

Identifying the effect of college education on business and employment survival

Abstract

We use a multipronged identification strategy to estimate the effect of college education on business and employment survival. We account for the endogeneity of both education and business ownership with a competing risks duration model augmented with a college selection equation. We estimate the model jointly on the self-employed and salaried employees in the National Longitudinal Survey of Youth 1979. Unlike most previous studies, we find that college does not increase business survival. By contrast, a college degree significantly increases employment survival. Cognitive skills have a positive impact on survival for both the self-employed and employees. These findings suggest that college benefits the self-employed less than salaried, perhaps by generating skills more useful in employment than self-employment, or because of differences in the value of signaling.

This is a preview of subscription content, access via your institution.

Notes

  1. 1.

    The Appendix contains a detailed description of how we constructed the employment status.

  2. 2.

    Keane and Wolpin (1997) do a similar exercise, but construct their employment variables looking at only 9 weeks during the year. They do so for computational reasons. We do not have the same limitations so working status uses all the information/weeks available. Keane and Wolpin also do not consider summer quarters to avoid picking up students’ summer jobs. We calculate the working status with and without summer weeks. The correlation across individuals between the two definitions ranges between .9 in 1979 and .97 in 2003.

References

  1. Angrist, J. D., & Krueger, A. B. (1991). Does compulsory school attendance affect schooling and earnings? The Quarterly Journal of Economics, 106(4), 979–1014. doi:10.2307/2937954.

    Article  Google Scholar 

  2. Arcidiacono, P., Bayer, P., & Hizmo, A. (2010). Beyond signaling and human capital: Education and the revelation of ability. American Economic Journal: Applied Economics, 2(4), 76–104. doi:10.1257/app.2.4.76.

    Google Scholar 

  3. Åstebro, T., Braunerhjelm, P., & Broström, A. (2013). Does academic entrepreneurship pay? Industrial and Corporate Change, 22(1), 281–311. doi:10.1093/icc/dts044.

    Article  Google Scholar 

  4. Backes-Gellner, U., & Werner, A. (2007). Entrepreneurial signaling via education: A success factor in innovative start-ups. Small Business Economics, 29(1/2), 173–190. doi:10.1007/s11187-006-0016-9.

    Article  Google Scholar 

  5. Becker, G. S. (1994). Human capital: A theoretical and empirical analysis with special reference to education (3rd ed.). Cambridge, MA: NBER Books, National Bureau of Economic Research, Inc.

    Google Scholar 

  6. Begley, T., & Boyd, D. (1987). Psychological characteristics associated with performance in entrepreneurial firms and smaller businesses. Journal of Business Venturing, 2(1), 79–93. doi:10.1177/0021886300361003.

  7. Berlew, D. (1975). The nature of entrepreneurs. Proceedings of project ISEED (international symposium on entrepreneurship and enterprise development) (pp. 42–44). Ohio: Columbus.

  8. Blanchflower, D. G., & Meyer, B. D. (1994). A longitudinal analysis of the young self-employed in Australia and the United States. Small Business Economics6(1), 1–19. doi:10.1007/BF01066108.

  9. Block, J. H., Hoogerheide, L., & Thurik, R. (2012). Are education and entrepreneurial income endogenous? A Bayesian analysis. Entrepreneurship Research Journal, 2(3). doi:10.1515/2157-5665.1051.

  10. Boden, R. J, Jr, & Nucci, A. R. (2000). On the survival prospects of men’s and women’s new business ventures. Journal of Business Venturing, 15(4), 347–362. doi:10.1016/S0883-9026(98)00004-4.

    Article  Google Scholar 

  11. Bruderl, J., Preisendorfer, P., & Ziegler, R. (1992). Survival chances of newly founded business organizations. American Sociological Review, 57(2), 227–242. doi:10.2307/2096207.

    Article  Google Scholar 

  12. Caliendo, M., Fossen, F., & Kritikos, A. S. (2014). Personality characteristics and the decisions to become and stay self-employed. Small Business Economics, 42(4), 787–814. doi:10.1007/s11187-013-9514-8.

    Article  Google Scholar 

  13. Card, D. (1995). Using geographic variation in college proximity to estimate the return to schooling. In L. N. Christodes, E. K. Grant, & R. Swidinsky (Eds.), Aspects of labour market behaviour: Essays in honour of John Vanderkamp. Toronto: University of Toronto Press.

    Google Scholar 

  14. Card, D. (1999). The causal effect of education on earnings. In O. Ashenfelter & D. Card (Eds.), Handbook of labor economics, Vol. 3A, Ch. 30. Amsterdam: Elsevier Science.

  15. Card, D. (2001). Estimating the return to schooling: Progress on some persistent econometric problems. Econometrica, 9(5), 1127–1160. doi:10.1111/1468-0262.00237.

  16. Chiappori, P.-A., Iyigun, M., & Weiss, Y. (2009). Investment in schooling and the marriage market. American Economic Review, 95(5), 1689–1713. doi:10.1257/aer.99.5.1689.

  17. Davidsson, P., & Gordon, S. R. (2012). Panel studies of new venture creation: A methods-focused review and suggestions for future research. Small Business Economics39(4), 853–876. doi:10.1007/s11187-011-9325-8.

  18. Davidsson, P., & Honig, B. (2003). The role of social and human capital among nascent entrepreneurs. Journal of Business Venturing, 18(3), 301–331. doi:10.1016/S0883-9026(02)00097-6.

  19. De Giorgi, G., Pellizzari, M., & Redaelli, S. (2010). Identification of social interactions through partially overlapping peer groups. American Economic Journal: Applied Economics, 2(2), 241–275. doi:10.1257/app.2.2.241.

  20. De Wit, G., & van Winden, F. A. A. M. (1989). An empirical analysis of self-employment in the Netherlands. Small Business Economics, 1(4), 263–272. doi:10.1007/BF00393805.

  21. Eberwein, C., Ham, J. C., & LaLonde, R. J. (1997). The impact of being offered and receiving classroom training on the employment histories of disadvantaged women: Evidence from experimental data. The Review of Economic Studies, 64(4), 655–682. doi:10.2307/2971734.

  22. Evans, D. S., & Leighton, L. S. (1989). Some empirical aspects of entrepreneurship. American Economic Review, 79(3), 519–535.

    Google Scholar 

  23. Evans, D. S., & Leighton, L. S. (1990). Small business formation by unemployed and employed workers. Small Business Economics, 2(4), 319–330. doi:10.1007/BF00401628.

    Article  Google Scholar 

  24. Falck, O., Heblich, S., & Luedemann, E. (2012). Identity and entrepreneurship: Do school peers shape entrepreneurial intentions? Small Business Economics, 39(1), 39–59. doi:10.1007/s11187-010-9292-5.

    Article  Google Scholar 

  25. Fossen, F. M., & Büttner, T. J. M. (2013). The returns to education for opportunity entrepreneurs, necessity entrepreneurs, and paid employees. Economics of Education Review, 37, 66–84. doi:10.1016/j.econedurev.2013.08.005.

    Article  Google Scholar 

  26. Ganotakis, P. (2012). Founders’ human capital and the performance Of UK new technology based firms. Small Business Economics, 39(2), 495–515. doi:10.1007/s11187-010-9309-0.

    Article  Google Scholar 

  27. Gimeno, F. J., Folta, T. B., Cooper, A. C., & Woo, C. Y. (1997). Survival of the fittest? Entrepreneurial human capital and the persistence of underperforming firms. Administrative Science Quarterly, 42(4), 750–783. doi:10.2307/2393656.

    Article  Google Scholar 

  28. Ham, J. C., & LaLonde, R. J. (1996). The effect of sample selection and initial conditions in duration models: Evidence from experimental data on training. Econometrica, 64(1), 175–205. doi:10.2307/2171928.

  29. Harmon, C., Oosterbeek, H., & Walker, I. (2003). The returns to education: Microeconomics. Journal of Economic Surveys17(2), 115–156. doi:10.1111/1467-6419.00191.

  30. Hartog, J., Van Praag, M., & Van Der Sluis, J. (2010). If you are so smart, why aren’t you an entrepreneur? Returns to cognitive and social ability: Entrepreneurs versus employees. Journal of Economics and Management Strategy, 19(4), 947–989. doi:10.1111/j.1530-9134.2010.00274.x.

  31. Heckman, J. J., Lochner, L. J., & Todd, P. E. (2006). Earnings functions, rates of return and treatment effects: The Mincer equation and beyond. In E. Hanushek & F. Welch (Eds.), Handbook of the economics of education (Vol. 1, Ch. 7). Amsterdam: North-Holland.

  32. Heckman, J. J., Moon, S. H., Pinto, R., Savelyev, P. A., & Yavitz, A. (2010). The rate of return to the HighScope Perry Preschool Program. Journal of Public Economics, 94(1), 114–128. doi:10.1016/j.jpubeco.2009.11.001.

    Article  Google Scholar 

  33. Heckman, J. J., Pinto, R., & Savelyev, P. A. (2013). Understanding the mechanisms through which an influential early childhood program boosted adult outcomes. The American Economic Review, 103(6), 2052–2086. doi:10.1257/aer.103.6.2052.

    Article  Google Scholar 

  34. Heckman, J. J., & Singer, B. (1984). Econometric duration analysis. Journal of Econometrics, 24(1/2), 63–132.

    Article  Google Scholar 

  35. Henrekson, M., & Sanandaji, T. (2014). Small business activity does not measure entrepreneurship. Proceedings of the National Academy of Sciences, 111(5), 1760–1765. doi:10.1073/pnas.1307204111.

    Article  Google Scholar 

  36. Hurst, E., & Pugsley, B. (2010). The non pecuniary benefits of small business ownership. University of Chicago, working paper.

  37. Keane, M. P., & Wolpin, K. I. (1997). The career decisions of young men. Journal of Political Economy105(3), 473–522. doi:10.1086/262080.

  38. Kenkel, D. S. (1991). Health behavior, health knowledge, and schooling. Journal of Political Economy, 99(2), 287–305. doi:10.1086/261751.

  39. Koellinger, P., Minniti, M., & Schade, C. (2007). I Think I Can, I Think I Can: Overconfidence and entrepreneurial behavior. Journal of Economic Psychology, 28(4), 502–527. doi:10.1016/j.joep.2006.11.002.

    Article  Google Scholar 

  40. Lechmann, D. S. J., & Schnabel, C. (2014). Are the self-employed really jacks-of-all-trades? Testing the assumptions and implications of Lazear’s theory of entrepreneurship with German data. Small Business Economics, 42(1), 59–76. doi:10.1007/s11187-012-9464-6.

    Article  Google Scholar 

  41. Lin, Z., Picot, G., & Compton, J. (2000). The entry and exit dynamics of self-employment in Canada. Small Business Economics, 15(2), 105–125. doi:10.1023/A:1008150516764.

    Article  Google Scholar 

  42. Lleras-Muney, A. (2005). The relationship between education and adult mortality in the United States. Review of Economic Studies, 72(1), 189–221. doi:10.1111/0034-6527.00329.

    Article  Google Scholar 

  43. Macpherson, D. A. (1988). Self-employment and married women. Economic Letters, 28(3), 281–284. doi:10.1016/0165-1765(88)90132-2.

    Article  Google Scholar 

  44. Martin, B. C., McNally, J. J., & Kay, M. J. (2013). Examining the formation of human capital in entrepreneurship: A meta-analysis of entrepreneurship education outcomes. Journal of Business Venturing, 28(2), 211–224. doi:10.1016/j.jbusvent.2012.03.002.

    Article  Google Scholar 

  45. Marvel, M. R., Davis, J. L., & Sproul, C. R. (2014). Human capital and entrepreneurship research: A critical review and future directions. Entrepreneurship Theory and Practice. doi:10.1111/etap.12136.

  46. Mayer-Haug, K., Read, S., Brinckmann, J., Dew, N., & Grichnik, D. (2013). Entrepreneurial talent and venture performance: A meta-analytic investigation of SMEs. Research Policy42(6), 1251–1273. doi:10.1016/j.respol.2013.03.001.

  47. Mengistae, T. (2006). Competition and entrepreneurs’ human capital in small business longevity and growth. Journal of Development Studies, 42(5), 812–836. doi:10.1080/00220380600742050.

    Article  Google Scholar 

  48. Millan, J. M., Congregado, E., & Roman, C. (2012). Determinants of self-employment survival in Europe. Small Business Economics, 38(2), 231–258. doi:10.1007/s11187-010-9260-0.

    Article  Google Scholar 

  49. Oberschachtsiek, D. (2012). The experience of the founder and self-employment duration: A comparative advantage approach. Small Business Economics, 39(1), 1–17. doi:10.1007/s11187-010-9288-1.

    Article  Google Scholar 

  50. Oreopoulos, P., & Salvanes, K. G. (2011). Priceless: The nonpecuniary benefits of schooling. The Journal of Economic Perspectives, 25(1), 159–184. doi:10.1257/jep.25.1.159.

  51. Parker, S. C., & Van Praag, C. M. (2006). Schooling, capital constraints, and entrepreneurial performance: The endogenous triangle. Journal of Business and Economic Statistics, 24(4), 416–431. doi:10.1198/073500106000000215.

    Article  Google Scholar 

  52. Puri, M., & Robinson, D. T. (2013). The economic psychology of entrepreneurship and family business. Journal of Economics and Management Strategy, 22(2), 423–444. doi:10.1111/jems.12013.

  53. Rauch, A., & Rijsdijk, S. A. (2013). The effects of general and specific human capital on long-term growth and failure of newly founded businesses. Entrepreneurship Theory and Practice, 37(4), 923–941. doi:10.1111/j.1540-6520.2011.00487.x.

    Article  Google Scholar 

  54. Rotter, J. (1966). Generalized expectancies for internal versus external control of reinforcements. Psychological Monographs: General and Applied, 80(1), 1–28.

    Article  Google Scholar 

  55. Sacerdote, B. (2001). Peer effects with random assignment: Results for Dartmouth roommates. Quarterly Journal of Economics, 116(2), 681–704. doi:10.1162/00335530151144131.

    Article  Google Scholar 

  56. Sanandaji, T. (2010). Self-employment does not measure entrepreneurship. Chicago: University of Chicago mimeo.

    Google Scholar 

  57. Simpson, W., & Sproule, R. (1998) Econometric analysis of canadian self-employment using SLID. Income and labour dynamics working paper series 98(16).

  58. Spence, M. (1973). Job market signaling. Quarterly Journal of Economics, 87(3), 355–374. doi:10.2307/1882010.

    Article  Google Scholar 

  59. Unger, J. M., Rauch, A., Frese, M., & Rosenbusch, N. (2011). Human capital and entrepreneurial success: A meta-analytical review. Journal of Business Venturing, 26(3), 341–358. doi:10.1016/j.jbusvent.2009.09.004.

    Article  Google Scholar 

  60. Van der Sluis, J., van Praag, M., & Vijverberg, W. (2008). Education and entrepreneurship selection and performance: A review of the empirical literature. Journal of Economic Surveys, 22(5), 792–841. doi:10.1111/j.1467-6419.2008.00550.x.

    Google Scholar 

  61. Van Praag, M. (2003). Business survival and success of young small business owners: An empirical analysis. Small Business Economics, 21(1), 1–17. doi:10.1023/A:1024453200297.

    Article  Google Scholar 

  62. Van Praag, C. M. (2007). Venture performance and venture inputs: The role of human and financial capital. In S. Parker (Ed.), The life cycle of entrepreneurial ventures. International Handbook Series on Entrepreneurship, Vol. 3, pp. 507–533. New York: Springer. doi:10.1007/978-0-387-32313-8_17.

  63. Van Praag, M., Van Witteloostuijn, A., & Van der Sluis, J. (2009). Returns for entrepreneurs versus employees: The effect of education and personal control on the relative performance of entrepreneurs vis-a-vis wage employees. IZA DP 4628, Bonn, Germany.

  64. Van Praag, M., Van Witteloostuijn, A., & Van der Sluis, J. (2013). The higher returns to formal education for entrepreneurs versus employees. Small Business Economics, 40(2), 375–396. doi:10.1007/s11187-012-9443-y.

    Article  Google Scholar 

  65. Von Graevenitz, G., Harhoff, D., & Weber, R. (2010). The effects of entrepreneurship education. Journal of Economic Behavior and Organization, 76(1), 90–112. doi:10.1016/j.jebo.2010.02.01.

    Article  Google Scholar 

  66. Webbink, D. (2005). Causal Effects in Education. Journal of Economic Surveys, 19(4), 535–560. doi:10.1111/j.0950-0804.2005.00258.x.

  67. Zimmerman, D. J. (2003). Peer effects in academic outcomes: Evidence from a natural experiment. Review of Economics and Statistics, 85(1), 9–23. doi:10.1162/003465303762687677.

    Article  Google Scholar 

Download references

Acknowledgments

We thank Luigi Zingales, Erik G. Hurst, Robert J. LaLonde, Susanne M. Schennach, Steven N. Kaplan, Adair Morse, Luigi Guiso, Margarita Tsoutsoura, James J. Heckman, the participants to many seminars at the University of Chicago and the participants to the Brownbag Seminar at Boston Fed for useful comments. Jacob Bergmann Larsen provided excellent research assistance. All remaining errors are ours. This research was conducted with restricted access to Bureau of Labor Statistics (BLS) data. The views expressed here do not necessarily reflect the views of the BLS. Financial support from the Jan Wallander and Tom Hedelius Foundation is gratefully acknowledged.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Andrea Asoni.

Additional information

A. Asoni: The views presented here are my own and do not necessarily reflect those of CRA or any CRA employee.

Appendices

Appendix 1

See Tables 1, 2, 3, 4 and 5.

Table 1 Comparison between men and women
Table 2 Human capital and business survival
Table 3 Human capital and employment survival
Table 4 Instrumental variables in the college selection equation
Table 5 Validity of instrumental variables

Appendix 2: Construction of yearly employment status

The discrete observation period is assumed to be a calendar year. Any construction of yearly employment and schooling status starting from weekly or monthly self-reported data is somewhat arbitrary since an individual can be in several alternatives in a given year. There is no unequivocal solution to this problem. We followed the classification method proposed by Keane and Wolpin (1997) who used the same dataset to estimate a life-cycle model.

Every individual is assigned to one of four mutually exclusive states (employment, self-employment, non-employment or school) in the following hierarchical way. First, we establish whether someone can be classified as employed, non-employed, self-employed or his/her status is missing for the year. (a) Missing Values, Employed or Non-employed: If the weekly working status is missing for more than 2/3 of the weeks in 1 year, then the yearly status is missing. When weekly status is available for more than two-thirds of the weeks, then an individual is considered working if he/she reports doing so for more than two-thirds of the non-missing weeks and averages at least 20 h of work per week. Otherwise the yearly status is coded as “non-employment.”Footnote 2 (b) Self-Employed: If an individual reports working as self-employed for more than half of the working weeks, then he/she is considered self-employed for the year.

Second, we establish whether someone classified as “non-employed” is, in fact, in school. An individual is classified in school during the current calendar year if he/she is not already classified as employed or self-employed and one of the two following statements is true: (a) He/she reports one more year of education the following calendar year and reports attending school at least during 1 month in the current calendar year; or (b) he/she reports attending school for at least 4 months during current calendar year. The second part of this definition is meant to capture those individuals who spent most of their time in school but for whatever reason did not complete the grade. We decided to give priority to the employment information rather than the schooling attendance variable because the former seems to be more accurate. First, it is collected on a weekly basis rather than a monthly basis. Second, in order to be employed, someone needs to work for more than 20 h a week. Third, according to the rules of the NLSY79, it is enough to have attended school for just 1 day in order to be classified as in school for the entire month.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Asoni, A., Sanandaji, T. Identifying the effect of college education on business and employment survival. Small Bus Econ 46, 311–324 (2016). https://doi.org/10.1007/s11187-015-9686-5

Download citation

Keywords

  • Business survival
  • Employment survival
  • College education
  • Cognitive skills
  • Locus of control

JEL Classifications

  • C41
  • J24
  • L26