Abstract
We explore how involuntary and voluntary exits from self-employment affect life and health satisfaction. To that end, we use rich longitudinal data from the German Socio-Economic Panel from 1985 to 2017 and a difference-in-differences estimation. Our findings suggest that while transitioning from self-employment to salaried employment (i.e., a voluntary self-employment exit) brings small improvements in health and life satisfaction, the negative psychological costs of business failure (i.e., switching from self-employment to unemployment) are substantial and exceed the costs of involuntarily losing a salaried job (i.e., switching from salaried employment to unemployment). Meanwhile, leaving self-employment has no consequences for self-reported physical health and behaviors such as smoking and drinking, implying that the costs of losing self-employment are largely psychological. Moreover, former business owners fail to adapt to an involuntary self-employment exit even two or more years after this traumatic event. Our findings imply that policies encouraging entrepreneurship should also carefully consider the costs of business failure.
Highlights
Starting and running a new business venture can be a great source of personal fulfillment and satisfaction (Benz and Frey 2008b; Binder and Coad 2013; Cardon et al 2012; Shir et al 2019; Stephan and Roesler 2010)
Losing self-employment decreases life satisfaction by 1.4 points and health satisfaction by about 0.3 points. While both the treatment and control groups start at average life satisfaction levels of 6.2, the life satisfaction of those who experience business failure drops to 5.0 following the loss of self-employment, while the life satisfaction of those who remain continuously self-employed increases very lightly to 6.4 (See Table A2)
Health satisfaction falls from 6.6 to 6.3 points for those experiencing a business exit to unemployment, while it remains stable for those who are continuously self-employed. These results are likely because involuntary self-employment exits are seen as life failures, which are damaging the psychological well-being of the former owner
Summary
Starting and running a new business venture can be a great source of personal fulfillment and satisfaction (Benz and Frey 2008b; Binder and Coad 2013; Cardon et al 2012; Shir et al 2019; Stephan and Roesler 2010). Individuals who have a higher sense of self-worth, perceived control, experience less financial strain, and do not strongly identify with their work are more likely to fare better during the unemployment spell and recover faster from the adverse experience (McKee-Ryan et al 2005; Wanberg 2012) From this perspective, the unemployment experience after a business exit (i.e., switching from selfemployment to unemployment) can be especially damaging to psychological well-being relative to the experience of unemployment due to a loss of salaried employment (i.e., switching from salaried employment to unemployment). Transitioning from self-employment to salaried employment can significantly alleviate the financial strain and psychological distress that immediately follow the business exit by providing founders with a new source of income and fulfilling basic psychological needs for time structure, social contact, shared common goals, status, and activity. The evidence above leads to our last hypothesis: H3: Voluntary transitions from one salaried job in the private sector to another one result in higher positive psychological well-being and perceived health benefits relative to changes from selfemployment to salaried employment
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