Does education enhance entrepreneurship?

Abstract

Formal education is correlated with entrepreneurial activity and success, but correlation does not indicate causation. Education and entrepreneurship are both influenced by other related factors. The current study estimates the causal effects of formal education on entrepreneurship outcomes by instrumenting for an individual’s years of schooling using cohort mean years of maternal schooling observed decades prior. We differentiate self-employment by industry employment growth and firm incorporation status. Policymakers are especially interested in entrepreneurship with the potential to create substantial employment growth. We find that an additional year of schooling increases self-employment in high-growth industries by 1.12 percentage points for women and by 0.88 percentage points for men. Education reduces the probability of male self-employment in shrinking industries. Education also increases incorporated self-employment for women and men and reduces unincorporated self-employment among men but not women. The overall probability of self-employment increases with education for women but is unaffected by education for men. The results suggest that formal education enhances entrepreneurship.