Happiness and Entrepreneurship: New Research Insights

Unemployed? Frustrated in your job? Can’t stand your boss? Then you may want to start your own business. You will not earn as much as you would have in your old job (assuming you had one); you will work much longer hours; you will face hassles with banks, tax authorities, officials and fickle customers; cut-throat competition may cause you bodily harm.

Don’t despair – on UN Photo / Evan Schneiderthe contrary, starting your own business is likely to make you a happier person. That is one of the salient facts from the scientific literature that emerged from a recent workshop on Happiness and Entrepreneurship organized by UNU-MERIT and the School of Governance in partnership with the Maastricht School of Management, ERIM and Erasmus University of Rotterdam and held in Rotterdam on 13 April 2012.

In a paper titled ‘Life satisfaction and self-employment: a matching approach‘ Alex Coad and Martin Binder showed, using a 10-year panel dataset from the UK, that entrepreneurs (the self-employed) enjoyed significantly higher life satisfaction than people who were in wage employment. “In our analysis we found that individuals moving from regular employment into self-employment … experience a positive and significant increase in life satisfaction, that actually increases from the first year of self-employment to the second”.

Although they are laughing, entrepreneurs are not laughing all the way to the bank because the average earnings of self-employed persons in UK are lower than that of salaried employees. Their average earnings are for instance much less than the earnings of bankers. It means the non-pecuniary benefits of being an entrepreneur compensate for the downsides mentioned.

What do these non-pecuniary benefits entail? It is the type of work that entrepreneurs do that matters. In a paper on ‘Determinants of job satisfaction: a European comparison of self-employed and paid employees‘, José María Millán and co-authors confirm that entrepreneurs enjoy greater job satisfaction in terms of work than salaried employees: “Self-employment has advantages in providing autonomy as compared to paid employment. Self-employed individuals are in charge and therefore capable of (re)defining their work, suggesting that introducing entrepreneurial aspects (i.e. autonomy, independence, etc.) to paid employed jobs may help to increase the job satisfaction of paid employees with their respective type of work”.

Starting your own business can therefore make you happier. It will make you even happier if you employ people. Moreover, there is a positive correlation between how entrepreneurial a society is and its national level of happiness. Consider the following graph, taken from a paper I co-authored with José Ernesto Amorós and Oscar Cristi and presented at the workshop: it clearly shows that countries that score well in terms of Global Entrepreneurship Development Index (GEDI) also score well in terms of happiness. The causality is likely to be bi-directional (Click to enlarge).

Naudé, Amorós & Cristi, 2012a

There are two caveats to the above. First, the results refer to the entrepreneurs and the employed on average. Entrepreneurs are a heterogeneous group. Joachim Merz and Tim Rathjen presented a paper based on the German Socio-Economic Panel that finds that even though poor entrepreneurs may earn incomes above the (income) poverty line, they are often still poor in other dimensions of wellbeing, such as time – i.e. entrepreneurs are often ‘time-poor’ compared to the employed.

Second, economic cycles impact negatively on entrepreneurs’ happiness. In their paper José María Millán and co-authors find that although entrepreneurs are more satisfied with their jobs in terms of the type of work they do, they tend to be less satisfied with respect to the security it affords. This may be particularly troublesome during economic downswings, such as during the current economic malaise in Western economies.

According to the Flickr / Adam CohnInternational Herald Tribune there has been a significant rise in suicides amongst entrepreneurs in European countries most affected by the economic crisis, particularly where social protection measures have been eroded by the fiscal austerity pandemic: “in the most fragile nations like Greece, Ireland and Italy, small-business owners and entrepreneurs are increasingly taking their own lives in a phenomenon some European newspapers have started calling ‘suicide by economic crisis’”.

For increasing national happiness the policy prescriptions for labour market reform and human resource management are clear: employees should be treated more like entrepreneurs; and entrepreneurs more like employees.

by Wim Naudé, Professorial Fellow at UNU-MERIT and the Maastricht Graduate School of Governance. Images: UN Photo / Evan Schneider; Naudé, Amorós & Cristi, 2012; Flickr / Adam Cohn