After graduating and being on the verge of entering the labor market, an individual has to make a number of choices. In this paper, we are interested in the choice of self-employment entry and fertility choices. A woman could enter self-employment for the first time before or after having children. If and when each of these events will take place will be influenced by a number of factors, and we will not go through previous research on factors affecting self-employment entry and fertility choices in general.Footnote 4
Self-employment entry before child birth
Self-employment is generally correlated with longer working hours than wage-employment (see, e.g., Andersson 2008; Benz 2008). Therefore, those who want to be self-employed would have incentives to start a business before having children, since they will be more time constrained when they have young children at home. Differences in working time between self-employment and wage-employment, particularly during the start-up phase, are likely to be important factors for women who choose self-employment as a career choice to develop a business idea or to earn more money than in wage-employment.
Self-employment is also assumed to be a more uncertain form of employment with a more insecure level of income, and it is believed to be correlated with a higher risk than taking a wage-earning job.Footnote 5 Hence, it might be less worrisome to start a business before having babies, since one has no children to support financially.
Anxo and Ericson (2015) analyze differences in parental leave during the child’s first 2 years between self-employed and wage-earning parents in Sweden. They find that both self-employed mothers and fathers take fewer days of parental leave. For mothers, they argue that one explanation is that women with a stronger commitment to market work are more likely to choose self-employment even if they plan for family and children. Being self-employed when having young children would give them a better opportunity to combine market work and family responsibilities even when the children are very young (e.g., below 1 year). According to this argument, women who have preferences for working while the child is young might choose self-employment already before childbirth.
If women in fertile ages who plan for children but do not yet have any and who choose self-employment are positively selected from the pool of all women in these age groups, then we would expect them to have better labor market outcomes as mothers compared to wage-earners. This type of selection will, however, not lead to any predictions about how women who enter self-employment before childbirth will perform compared to women who enter self-employment after childbirth. It is possible that women who enter self-employment after childbirth also are positively selected from the pool of wage-earners who have (young) children. Anxo and Ericson (2015) do not make any inference about how women who already have children are selected into self-employment.
Self-employment entry after childbirth
Even though self-employed, on average, spend more time on market work than wage-earners, self-employment is also assumed to be a more flexible form of employment than wage-employment. As self-employed, it is easier to decide how much to work and on what days of the week. These qualities of self-employment are assumed to increase the demand for self-employment among women with young children. A number of previous studies find a positive correlation between self-employment and the presence of young children in the household. Hence, we expect that all else being equal, self-employment entry should be higher among women who already have children compared to women who do not have any children.
A second reason for becoming self-employed after childbirth is that the parental leave benefits in Sweden are strongly dependent on previous income, and incomes among the self-employed are, on average, lower than among wage-earners. In the Swedish parental leave system, a pre-birth earnings level is calculated for all expecting mothers. For wage-earners, the employer sends information on actual wages to the Social Insurance Agency. For the self-employed, the procedure is more complicated. The aim of the social insurance system is to create equality between different employment forms so that, for example, the self-employed will not be disadvantaged in the social security system. The system has been criticized for not being very transparent and for being difficult to fully understand. To simplify, it can be said that pre-birth earnings are based on the average income in the firm during the three previous years. An important rule is, however, that this income never can exceed the income a comparable wage-earner receives, that is, a wage-earner performing a similar job. If the firm is in the start-up phase, which normally lasts between 1 and 3 years, the income can be lower than what “normally” would be the case. Then, the actual income can be ignored, and case workers at the Social Insurance Agency directly determine a comparable income and use this as an estimate of pre-birth earnings. It is difficult to say exactly how the setup of the system affects women’s incentives to become self-employed, but one possible effect is that women postpone self-employment entry until after child birth if they anticipate that parental leave benefits will be negatively affected by self-employment.
Actual pre-birth earnings might also have a direct effect on fertility, not only via its impact on parental insurances. Many couples might wait until they have stable economic circumstances to have children, since better economic resources generally mean better conditions for taking care of a child. Andersson (2000), using Swedish data, finds that a lower income prior to childbirth has a negative effect of first birth rates.
To sum up, some women have no preference for becoming self-employed, no matter their family situation. But among those who do have this preference, the presence of children could be important. There are reasons to become self-employed both before and after childbirth, and it is likely that the motives for women to become self-employed differ depending on the presence of children. This, in turn, might affect outcomes.
How does the presence of children at the time of self-employment affect self-employment outcomes?
Our initial hypothesis was that the circumstances, under which the business was started, particularly if the women were childless or had children, will have an effect on subsequent self-employment performance. But the direction the effect will go is an empirical question. Based on previous research, we have reasons to expect that women who are childless when entering self-employment will perform better.
It is well documented that mothers earn less than women without children among wage-earners, i.e., there is a so-called motherhood wage penalty.Footnote 6 However, the existence of such a relationship has not been confirmed for the Nordic countries, although one clearly observes a drop in earnings when the child is born (Gash 2009). It is estimated that earnings catch up in the long run (Angelov and Karimi 2012). Less is known about the existence of such a gap among self-employed women. Hundley (2000, 2001) analyzes the effects of marriage and children on self-employment earnings using US data (NLS-72). He finds that both marriage and children have a negative impact on self-employment earnings among women, while it is positively related to self-employment earnings among men. He also finds that earnings among wage-earners are much less sensitive to both marital status and family size (Hundley 2000).
Marshall and Flaig (2014) use a nationally representative dataset for the US to analyze the association between marriage and children and self-employment earnings among women. Unlike many previous papers, but similar to the present study, they restrict the sample to self-employed women and compare earnings between married and single women. They hypothesize that married women will have lower earnings. In accordance with their hypothesis, they find that being married and having children is negatively correlated with self-employment earnings.
Williams (2004) studies the effects of child care activities on self-employment duration in Europe and finds, in accordance with the expectation, that time spent on child care decreases duration in self-employment.
These are highly relevant results for the research question asked in the present paper. Although we include controls for contemporaneous fertility, i.e., the number of children in the same year as the outcomes are measured, we focus more on the impact of having children at the time of self-employment entry.
Analyzing self-employment survival of men and women in Canada, Rybczynski (2015) finds that the probability of exiting self-employment for women is increasing in the number of children below 15 years of age, but for men, the number of children has no impact on business survival.
Although based on a small sample of self-employed, Rey-Martí et al. (2015) find that women who state that they became self-employed to pursue a better work-life balance are less likely to succeed. Hughes (2006) also finds indications that women who state that they became self-employed for “work-family” reasons have lower incomes from self-employment than those having “classic” motives such as independence, challenge, and financial independence. Burke et al. (2002) do, however, find that non-pecuniary motives to enter self-employment have a positive impact on performance for males, and they find no evidence that women entering self-employment for this reason perform worse, or better, than women who enter for other reasons.
The impact of other factors on self-employment success
Self-employment success can be measured in several ways. Income from self-employment, exit and survival rates, and job and wealth creation are some commonly studied outcomes. Outcomes may be affected by many different factors, such as age, education, experience, marital status, region, country of birth, and macroeconomic variables such as unemployment and GDP. In the following section, we provide a brief overview of what previous studies have found about these relationships.Footnote 7 The fact that different factors might affect different outcomes differently makes the overview complex.
Many previous studies have looked at the importance of wealth or liquidity constraints, both for self-employment entry and for success (see, e.g., Holtz-Eakin et al. 1994; Hurst and Lusardi 2004; Rybczynski 2015; Taylor 1999). The results from these studies are somewhat mixed. There is no information on wealth in the dataset used for the analysis in this paper. I will therefore not go into more detail about the importance of this variable.
Self-employment earnings
When self-employment performance is analyzed in terms of earnings, the variable that has received the most attention is education. van der Sluis et al. (2008) review empirical studies of the impact of formal schooling on self-employment performance. They conclude that formal education appears to increase self-employment earnings. They also conclude that the effect of education on earnings is smaller for self-employed than for wage-earners in Europe, while the opposite is true in the USA. Another interesting conclusion is that self-employed women seem to benefit more from education compared to their male counterparts. Only looking at self-employed women, Marshall and Flaig (2014) also find a positive impact of education on earnings.
Survival
One of the most studied self-employment outcomes is the exit rate out of self-employment (see, e.g., Taylor 1999; Millán et al. 2012). Previous results suggest a non-linear effect of age on the exit rate. Exit rates seem to be high in the youngest age group, but it also appears that the risk of exiting increases after age 40–50 years (Taylor 1999; Millán et al. 2012).
Formal education appears to have mixed effects on self-employment survival. The correlation between education and survival rates partly depends on whether all exits are studied together or whether exits are divided depending on destination, i.e., wage-employment or unemployment. Education is also likely to affect the exit rate differently over the business cycle. There are some indications that those self-employed with higher education are more likely to exit in economic booms, probably due to better outside options. In an economic recession, exit rates are lower among those with higher education (Kangasharju and Pekkala 2002). Taylor (1999) finds that qualifications are weakly correlated with exit rates, and it is suggested that formal qualifications do not need to be a good predictor of self-employment success. Millán et al. (2012), on the other hand, find a positive impact of formal education on survival in self-employment. After controlling for selection into self-employment and ability, Asoni and Sanandaji (2016) find no impact of college education on business survival in the USA.
Previous research suggests that labor market experience prior to self-employment is an important determinant of business success. Unemployment experience increases exit rates, while previous experience in self-employment or wage-employment decreases the risk of exiting (Taylor 1999; Millán et al. 2012).
There is a large body of literature looking at self-employment among immigrants and that analyzes both entry and exit rates. Andersson Joona (2010) finds that immigrants in Sweden are more likely to exit self-employment to unemployment, while natives are more likely to exit self-employment to wage-employment. Aldén and Hammarstedt (2015) report similar results. Fairlie and Robb (2007) find that black-owned businesses in the USA are less successful than businesses owned by whites. They conclude that an important factor in explaining these differences is the lack of experience of working in family-owned businesses among blacks. This is because it is less common among black business owners to have self-employed family members.
The unemployment rate could affect business survival in two ways. Exits from self-employment could increase in an up-turn, since the number of outside options increase, i.e., it will be easier to gain wage-employment. But exits could also decrease when the economy is booming and unemployment is low, since business opportunities might improve. The evidence on this is mixed. Taylor (1999) finds that unemployment at the time of self-employment entry is positively related to the exit rate, while Lin et al. (2000) find no impact of unemployment on the exit rates.
Job creation
Burke et al. (2002) use job creation as a measure of self-employment performance. They find that professional qualifications are not significantly related to job creation among female entrepreneurs, while it is positively correlated among males. Henley (2005) also analyzes job creation by the self-employed. He uses housing wealth as a measure of financial capital and finds that it is positively correlated with small business job creation. Having self-employed parents, which is a measure of entrepreneurial capital, is also positively correlated with job creation, particularly if the parents employed others. Education also seems to be positively correlated with job creation, while foreign background, for example, has no significant impact.