The imprint of labor markets on entrepreneurial performance

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Seok-Woo Kwon discusses the earnings of individual entrepreneurs from the beginning of their entrepreneurial careers, examining the effects of labor markets on their earnings trajectory.

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Seok-Woo Kwon discusses the earnings of individual entrepreneurs from the beginning of their entrepreneurial careers, examining the effects of labor markets on their earnings trajectory.

Image courtesy of interviewee. July 31, 2024

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This video is a transcription of a discussion between a professor and an interviewer regarding a study on the impacts of labor markets on entrepreneurial performance. The professor explains that the research stemmed from questions posed by students during the 2008 economic recession about the feasibility of starting a business during such trying economic times.

The professor highlights findings from labor economics literature, illustrating that individuals who enter the job market in a challenging economy tend to face long-term earnings disadvantages compared to those who enter during favorable conditions. This video phenomenon, known as an "earnings gap," persists even after economic recovery and affects various groups, including PhD graduates.

The main aim of the professor's study is to explore whether similar long-term consequences apply to entrepreneurs who start businesses in a poor economy. The research looks at the imprinting hypothesis, suggesting that entrepreneurs who start businesses during challenging times may adopt lower-risk, lower-return strategies that influence their long-term performance.

The study uses the National Longitudinal Survey of Youth dataset, which tracks individuals over time, allowing for analysis of their earnings trajectories. Preliminary findings reveal that starting a business in a bad economy is correlated with decreased earnings, persisting for as long as ten years. Notably, a 1% increase in initial unemployment rates could lead to a 13% reduction in entrepreneurs' earnings.

The discussion also covers factors that might ameliorate these negative outcomes, such as relocating or shifting sectors, which can help entrepreneurs reset their trajectories. Ultimately, the research indicates that while starting a business in a bad economy poses greater risks, those who survive beyond five years can earn more than non-entrepreneurs in stable employment, suggesting that entrepreneurship can still pay off in the long run despite initial challenges. Future research areas were mentioned, but specific directions were not detailed in the excerpt.

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Here are five key points derived from the video:

1. **Impact of Economic Conditions on Entrepreneurship**: The speaker discusses the effects of starting a business in a bad economy, specifically during the recession of 2008, highlighting that individuals entering the business world during challenging economic times may adopt more conservative, low-risk strategies, which can negatively impact their long-term earnings and business performance.

2. **Long-Term Earnings Consequences**: Research suggests that entrepreneurs who start in a bad economy face enduring gaps in earnings compared to those who start in a good economy, with a striking statistic indicating that a 1% increase in unemployment at the time of entry correlates to a 13% decrease in earnings over the following years.

3. **Imprinting Hypothesis**: The speaker references the imprinting hypothesis from sociology, which posits that experiences in formative years have long-lasting influences on individuals and organizations. This is applied to entrepreneurs, indicating that their initial experiences in a challenging economic environment might shape their future business decisions and strategies.

4. **Methodology and Dataset**: The study utilizes longitudinal data from the National Longitudinal Survey of Youth, enabling researchers to track participants' career trajectories from youth into their prime working years. This dataset allows for a comprehensive analysis of how initial economic conditions influence later earning patterns.

5. **Comparison to Non-Entrepreneurs**: Interestingly, despite the challenges of starting a business in a bad economy, entrepreneurs who manage to survive for more than five years may eventually earn more than their peers in salaried positions. This highlights the potential for entrepreneurship to be a beneficial long-term career path, even in adverse economic conditions, the entrepreneur can withstand the initial difficulties.

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Here are some key quotes from the video that summarize its main points and findings regarding entrepreneurship in a bad economy:

1. **Initial Doubt**:
- "I was getting a question from the students whether it is still good to start business in this kind of business environment. And I really didn't have a good answer for that."

2. **Long-Term Earnings Impact**:
- "What is surprising about the research is that even after the economy recovers... you still have... a big earnings gap between people who enter in a good job market and a bad job market."

3. **Historical Data**:
- "So our contribution is that instead of looking at this selection effect, we will need to look at the what we call treatment effect of labor, initial economy."

4. **Imprinting Hypothesis**:
- "If the entrepreneurs start business in a bad economy, they will probably adopt more low risk, low return kind of business strategy... that will have a long lasting influence on their performance in the long run."

5. **Data Sources**:
- "Fortunately, we are able to obtain a data set called the National Longitudinal Survey of Youth... it started in collecting data in 1979."

6. **Unemployment Rate Impact**:
- "One percent increase in unemployment at the initial entry point will lead to about 13% decrease in entrepreneurs' earnings."

7. **Comparative Advantage**:
- "Entrepreneurs starting in a bad economy will not do as well... compared to the entrepreneurs starting in a good economy."

8. **Long-Term Benefits of Survival**:
- "Even in a bad economy, entrepreneurship pays off in the long run compared to salaried employees if they survive five years."

These quotes encapsulate the central themes of the discussion, including the initial hesitations regarding starting a business in a challenging economy, the effects of economic conditions on entrepreneurial outcomes, and the long-term implications of those early decisions.

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I was teaching, entrepreneurship class, to,

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and during the great recession of 2008,

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I was getting a question from the students whether,

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it is still good to start business in this kind of,

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business environment.

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Uh, and I really didn't have a good answer for that.

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Uh, so I did, I started to look at,

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in the literature, what kind of research has been done.

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Uh, and the closest thing that I could find,

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is from the, labor economics.

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Basically, they were studying, college graduates

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entering job market in a bad economy.

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Uh, and what they found, obviously, compared

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to the people who are entering into good job market,

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so your initial earnings are a little bit lower.

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That's kind of obvious that's to be expected.

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But what is surprising about, the research, is

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that, even after the economy recovers and

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after four, five years down the road, you still have,

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sort of the big, earnings gap between people

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who enter in a good job, good job market,

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and a bad job market.

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And that was pretty intriguing.

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Again, this is not entrepreneurship, but,

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but this is, people who are entering into labor market.

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And then there are also other studies

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who look at MBA students, for example,

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or people who are, entering,

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job market in a good economy.

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Again, good, MBA salaries,

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can accumulate over time.

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And if you look at, if you compare people

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who are entering good job market versus bad job market,

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the lifetime, income difference can be as large

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as 1 million to five, a million US dollars.

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So that was a pretty huge,

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and for finally, for the PhD,

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economist who entering the job market, again,

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the, the research suggests that there is an immediate hit.

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Uh, if you are entering job market in a, a bad market,

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then you're less likely to be hired by a prestige university

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and also, or you are less likely to get a,

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a tenure track jobs, more sort

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of the permanent track kind of jobs.

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And this effect continues up to about 12 years.

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So when you go back to the, people

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who started at the job, bad job market, you are,

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still finding that they are lagging behind.

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Uh, and what's most fascinating is also they are lagging

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behind, not just in the sort of the earnings, but also their

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Output quality.

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So they publish less number of papers,

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and also they publish, in, less,

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I guess they were not able

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to publish in a high quality journals.

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So all of this was, fascinating.

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Uh, but again, going back to the, my initial question.

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So what is the long-term consequence

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of starting a business in a bad economy?

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Uh, I didn't, have that answer.

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So, so leveraging on these kind of, labor market,

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research, I will, I wanted to sort

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of look at the similar question in

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the entrepreneurship context.

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I think the literature on macroeconomic condition

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and entrepreneurship, basically look at

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what we call selection effect.

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Uh, basically means that, whether good economy

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or bad economy encourages more entrepreneurship.

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So like most academic leaders, there are two,

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schools of thought.

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So, one school of thought says that, there is a,

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a recession push hypothesis.

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Uh, in other words, bad, economy

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will create more entrepreneurial entry

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because people cannot get a, a regular job,

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so they start their own business.

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And then the other, sort of perspective argues

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that prosperity pool hypothesis.

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So good job, good economy, lead

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to more entrepreneurial, entry.

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Again, the mix, the empirical evidence is mixed.

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Uh, and, the kind of, the literature here,

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was not yielding any new insight.

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So the, my, our contribution, is that instead

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of looking at this selection effect, we will need

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to look at the, what we call treatment effect of labor,

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initial, economy.

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So what's going to happen, if you

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start a business in a bad economy, will

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that effect will be short term

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or maybe, it could be also long term.

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So, so we draw on the imprinting hypothesis from,

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sociology.

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There is a great, sociology named the Stinchcomb,

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who published book in 1965,

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and argues that, just like young animals, who are,

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strongly influenced by their,

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early years experience, organizations

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and business can be, also strongly, influenced

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by the stamp of the environment in a formative period.

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Uh, so we suspect,

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or our intuition is

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that if the entrepreneurs start business in a bad economy,

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they will probably adopt more low risk, low return kind

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of business strategy,

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and that will going

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to have a long lasting influence on their,

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performance, in the long run.

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So there is a bit of, evidence for that.

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Uh, for example, prior research suggests that if,

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CEOs who experience recession as a manager, not as a CEO,

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but as a manager, if they experience recession,

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then when they become CEO, they spend,

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less in r and d.

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And also they are very concerned about cost effectiveness.

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So the earlier experience

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of managers can still influence their,

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current CEO job, I guess the,

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their strategy of managing their organization.

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So I think the same thing could be happening,

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with the entrepreneurs as well.

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So, so our hypothesis of this paper was that whether,

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the effect of labor market

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or the economy at entry will

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persist over entrepreneurs earning trajectory,

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over long time.

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So we just wanted, we wanted to test that, ideas

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with the dataset.

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In order to examine this hypothesis.

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We need a longitudinal data set.

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Uh, because we are interested in, trajectory

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of entrepreneurs earnings over the years, we need,

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we need to able to track their

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earnings history for some time.

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So, fortunately, we are able to

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obtain a data set called the National Longitudinal Survey

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of Youth, and it's a US data set.

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Uh, it's a national representative sample of about 12,000,

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individuals.

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Uh, and it started in collecting data,

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in 1979,

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and when the respond was about 14

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to 22 years old.

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Uh, and the last wave we have from this data set was

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2010,

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when the respondents were about 45

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to 53.

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So, the,

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this data set covers their prime working years.

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Uh, and another advantage of this data set is

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that we are able to track,

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the individual's career from the very, beginning.

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So, so we are able to create a, a career trajectory.

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And, with the, with this, with this

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Data set, we also combined, unemployment rate,

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information from the, US census.

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Uh, so we are able to look at the unemploy, the influence

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of unemployment rate in, the location

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where these individuals live,

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and then how does that, influence, their,

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earnings trajectory.

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Uh, and some of them are regular employees

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and some of them, starts their own business.

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So I, we are able to compare, their, entrepreneurial

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earnings trajectory, for some individuals.

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And we also all look at the sort, the wage,

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earnings trajectory for others.

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Something we need to make sure is that we are comparing,

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apples and apples,

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or we, we shouldn't be comparing apples and oranges.

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So when we are comparing, entrepreneurs who

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started in good economy versus bad economy,

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we wanna make sure that they are comparable while people

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turns out that they are not comparable.

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Uh, when I, when I look at entrepreneurs who started,

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in a bad economy, they tend to be younger.

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They tend to have a lower cognitive ability,

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lower intelligence, less education,

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and they have a, a high employment on

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insta insta instability.

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Uh, and also they had a lower wage,

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before they enter entrepreneurship,

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and they were mostly engaged in manual task.

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So, we wanted to first of all,

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control for this statistically

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and, be able to compare similar kinds

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of individuals entering in two different kind of,

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economic, situations.

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So we, we did that.

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After we have done that, we found that, the,

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initial, unemployment rate,

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at the time of entry has a long-term influence as long

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as 10 years after entry.

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So, for example, one, percent,

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increase in unemployment at the

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initial, entry point will lead to about

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13% decrease in,

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entrepreneurs earnings.

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Uh, so that was a pretty dramatic, finding,

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we found.

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So what are the, reasons

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or mechanisms behind it?

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Uh, our, speculation is that there is,

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some kind of task specific human capital,

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being developed by the entrepreneurs.

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So if I give, maybe,

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if I could give an example, instead of starting,

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restaurants, maybe entrepreneurs will go,

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start food trucks.

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If they are starting in a, a, a bad economy,

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and one, even after the economy improves,

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because they started at the, they were, being,

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so used to, they already invested in certain kind

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of skills they need, running a food truck,

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they are more likely to stay there,

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and then it'll have a long-term,

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influence on their earnings trajectory down the road.

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So, one may.

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So we also found that, if

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entrepreneurs, move away from the location

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where they start their initial business,

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or they start different kind of business, then they,

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they were able to reset the clock.

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And, the initial influence of bad,

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economy has, a lot less influence on their,

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later incomes.

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So there were a bit of a moderation effect.

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One of the interesting policy question is that,

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is encouraging entrepreneurship by government officials

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in a bad economy really a, a good, policy.

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Uh, so I think the, the answer to this,

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question is a little bit nuanced.

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Uh, if you are comparing, entrepreneurs,

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who are starting in a good economy versus bad economy,

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turns out that our research suggests that, may

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compared to the entrepreneurs starting in a good economy,

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maybe,

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entrepreneurs starting in a bad economy will not do as well.

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On the other hand, if we compare,

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entrepreneurs starting a bad economy with the,

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non entrepreneurs, employees who just,

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who never try entrepreneurship, it turns out

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that even if entrepreneur who starts in a bad economy, if,

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they can survive for more than five years,

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that is big if,

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Because a lot of, new business fail.

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But if they can survive for more than five years,

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it turns out that they earn more than comparable,

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salary employees.

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So even in a bad economy, entrepreneurship pay off,

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in the long run compared to the,

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salaried employees if they survive five years.

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But if they don't, then I think that's a different question.

Quick Answers

"Navigating Entrepreneurship During Economic Turmoil: Insights from Labor Market Research"

00:00:00 - I was teaching, entrepreneurship class, to, and during the great recession of 2008, I was getting a question from the students whether, it is still good to start business in this kind of, business environment. and I really didn't have a good answer for that. so I did, I started to look at, in the literature, what kind of research has been done. and the closest thing that I could find, is from the, labor economics. Basically, they were studying, college graduates
00:00:45 - and what they found, obviously, compared to the people who are entering into good job market, so your initial earnings are a little bit lower. That's kind of obvious that's to be expected. But what is surprising about, the research, is that, even after the economy recovers and after four, five years down the road, you still have, sort of the big, earnings gap between people who enter in a good job, good job market, and a bad job market.
00:01:26 - Again, this is not entrepreneurship, but, but this is, people who are entering into labor market. And then there are also other studies who look at MBA students, for example, or people who are, entering, job market in a good economy. Again, good, MBA salaries, can accumulate over time. And if you look at, if you compare people who are entering good job market versus bad job market, the lifetime, income difference can be as large as 1 million to five, a million US dollars.
00:02:06 - and for finally, for the PhD, economist who entering the job market, again, the, the research suggests that there is an immediate hit. if you are entering job market in a, a bad market, then you're less likely to be hired by a prestige university and also, or you are less likely to get a, a tenure track jobs, more sort of the permanent track kind of jobs. And this effect continues up to about 12 years. So when you go back to the, people who started at the job, bad job market, you are,
00:02:50 - and what's most fascinating is also they are lagging behind, not just in the sort of the earnings, but also their Output quality. So they publish less number of papers, and also they publish, in, less, I guess they were not able to publish in a high quality journals. So all of this was, fascinating. but again, going back to the, my initial question. So what is the long-term consequence of starting a business in a bad economy? I didn't, have that answer. So, so leveraging on these kind of, labor market,
00:03:33 - of look at the similar question in the entrepreneurship context. I think the literature on macroeconomic condition and entrepreneurship, basically look at what we call selection effect. basically means that, whether good economy or bad economy encourages more entrepreneurship. So like most academic leaders, there are two, schools of thought. So, one school of thought says that, there is a, a recession push hypothesis. in other words, bad, economy

"Analyzing the Impact of Economic Conditions on Entrepreneurial Success: Insights and Hypotheses"

00:04:15 - because people cannot get a, a regular job, so they start their own business. And then the other, sort of perspective argues that prosperity pool hypothesis. So good job, good economy, lead to more entrepreneurial, entry. Again, the mix, the empirical evidence is mixed. and, the kind of, the literature here, was not yielding any new insight. So the, my, our contribution, is that instead of looking at this selection effect, we will need
00:04:59 - initial, economy. So what's going to happen, if you start a business in a bad economy, will that effect will be short term or maybe, it could be also long term. So, so we draw on the imprinting hypothesis from, sociology. There is a great, sociology named the Stinchcomb, who published book in 1965, and argues that, just like young animals, who are, strongly influenced by their,
00:05:40 - and business can be, also strongly, influenced by the stamp of the environment in a formative period. so we suspect, or our intuition is that if the entrepreneurs start business in a bad economy, they will probably adopt more low risk, low return kind of business strategy, and that will going to have a long lasting influence on their, performance, in the long run. So there is a bit of, evidence for that.
00:06:23 - CEOs who experience recession as a manager, not as a CEO, but as a manager, if they experience recession, then when they become CEO, they spend, less in r and d. And also they are very concerned about cost effectiveness. So the earlier experience of managers can still influence their, current CEO job, I guess the, their strategy of managing their organization. So I think the same thing could be happening,
00:07:01 - So, so our hypothesis of this paper was that whether, the effect of labor market or the economy at entry will persist over entrepreneurs earning trajectory, over long time. So we just wanted, we wanted to test that, ideas with the dataset. In order to examine this hypothesis. We need a longitudinal data set. because we are interested in, trajectory of entrepreneurs earnings over the years, we need,
00:07:44 - earnings history for some time. So, fortunately, we are able to obtain a data set called the National Longitudinal Survey of Youth, and it's a US data set. it's a national representative sample of about 12,000, individuals. and it started in collecting data, in 1979, and when the respond was about 14 to 22 years old. and the last wave we have from this data set was

"Analyzing Career Trajectories: The Impact of Economic Conditions on Entrepreneurial and Wage Earnings"

00:08:24 - when the respondents were about 45 to 53. So, the, this data set covers their prime working years. and another advantage of this data set is that we are able to track, the individual's career from the very, beginning. So, so we are able to create a, a career trajectory. And, with the, with this, with this Data set, we also combined, unemployment rate, information from the, US census. so we are able to look at the unemploy, the influence
00:09:11 - where these individuals live, and then how does that, influence, their, earnings trajectory. and some of them are regular employees and some of them, starts their own business. So I, we are able to compare, their, entrepreneurial earnings trajectory, for some individuals. And we also all look at the sort, the wage, earnings trajectory for others. Something we need to make sure is that we are comparing,
00:09:50 - or we, we shouldn't be comparing apples and oranges. So when we are comparing, entrepreneurs who started in good economy versus bad economy, we wanna make sure that they are comparable while people turns out that they are not comparable. when I, when I look at entrepreneurs who started, in a bad economy, they tend to be younger. They tend to have a lower cognitive ability, lower intelligence, less education,
00:10:32 - insta insta instability. and also they had a lower wage, before they enter entrepreneurship, and they were mostly engaged in manual task. So, we wanted to first of all, control for this statistically and, be able to compare similar kinds of individuals entering in two different kind of, economic, situations. So we, we did that. After we have done that, we found that, the,
00:11:16 - at the time of entry has a long-term influence as long as 10 years after entry. So, for example, one, percent, increase in unemployment at the initial, entry point will lead to about 13% decrease in, entrepreneurs earnings. so that was a pretty dramatic, finding, we found.
00:11:55 - or mechanisms behind it? our, speculation is that there is, some kind of task specific human capital, being developed by the entrepreneurs. So if I give, maybe, if I could give an example, instead of starting, restaurants, maybe entrepreneurs will go, start food trucks. If they are starting in a, a, a bad economy, and one, even after the economy improves,

"Long-Term Earnings Trajectories: The Impact of Economic Conditions on Entrepreneurs"

00:12:40 - so used to, they already invested in certain kind of skills they need, running a food truck, they are more likely to stay there, and then it'll have a long-term, influence on their earnings trajectory down the road. So, one may. So we also found that, if entrepreneurs, move away from the location where they start their initial business,
00:13:21 - they were able to reset the clock. And, the initial influence of bad, economy has, a lot less influence on their, later incomes. So there were a bit of a moderation effect. One of the interesting policy question is that, is encouraging entrepreneurship by government officials in a bad economy really a, a good, policy. so I think the, the answer to this,
00:14:01 - if you are comparing, entrepreneurs, who are starting in a good economy versus bad economy, turns out that our research suggests that, may compared to the entrepreneurs starting in a good economy, maybe, entrepreneurs starting in a bad economy will not do as well. On the other hand, if we compare, entrepreneurs starting a bad economy with the, non entrepreneurs, employees who just, who never try entrepreneurship, it turns out
00:15:17 - they can survive for more than five years, that is big if, Because a lot of, new business fail. But if they can survive for more than five years, it turns out that they earn more than comparable, salary employees. So even in a bad economy, entrepreneurship pay off, in the long run compared to the, salaried employees if they survive five years. But if they don't, then I think that's a different question.

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