There are many reasons to consider self-employment or starting your own business, but as it turns out the actual number one reason cited is not living the dream, but frustration! These are the findings of a study done at Stanford University that analysed detailed census and labour market data from Denmark. Periods of self-employment are very common, in the US around 40% of men in their early fifties will have experienced at least one period of self-employment (the rates for women are still significantly lower). Given the very high number of independent contractors in Australia, the proportion is likely to be higher here again. So the question they studied was why people chose self-employment, what drove the decision to go out on their own? The result was that most people decided to pursue self-employment because their career ambitions could not be realised with their current employer. They were frustrated and felt stifled in progressing their career.
They further found that people who chose self-employment clearly understood that for the vast majority, big-time success is elusive and work as an entrepreneur means incurring a wage penalty. In reality, the earnings of the self-employed are substantially lower than those of wage earners at all but the very highest percentiles of the wage distribution. Moreover, careful analysis suggests that entrepreneurs would be better off, in terms of earnings, if they remained in paid employment. If this is the case, why would people leave paid employment for entrepreneurship? Previously, most career advisers and researchers had assumed that the quest for more autonomy, being your own boss, plays a big role in making the choice to become an entrepreneur. Yet the data does not support this assumption. Only about 13% of would-be entrepreneurs decide on self-employment before they have identified a specific opportunity. This small subset are the ‘hard-core’ entrepreneurs, driven by a desire to succeed and to be autonomous. The vast majority decides very differently.
The most likely candidate for self-employment according to the study is someone who has long tenure in their current position without opportunity for advancement or significant wage increases. That they have long tenure implies they are a good match for the role and organisation (since otherwise they would have looked for a new job elsewhere and left). The only reasons to leave a role you are a good match for would be that either your ambitions cannot be realised with your current employer or that something substantial has changed (manager, role, redundancy etc.). The most surprising insight is that today entrepreneurship has little to do with a romanticised picture of individual freedom and ‘setting out to create something big’. In most instances it would appear the choice for self-employment is like a sideways career move, a transition to something different, a way of opening up new career opportunities outside the current dead end. Given the high percentage of (at least) men who try this path, we should assume that a period of self-employment is quite a normal part of career development these days and even more likely to be in the future.
If this is how the choice is perceived by the majority transitioning to self-employment, it would also imply that most people making the move are potentially ill prepared for the downside of self-employment: long hours, poor and unpredictable income streams, and little job security. That said, about 17% of the total workforce in Australia are self-employed or small-business owners, which equates to 28% of the private-sector workforce (see here). Given the relative longevity of small businesses in Australia (50% survival rate 3 years after starting up), self-employment is obviously working out for a great many people.
We have seen many people start their own business or become self-employed over the 13 years of coaching we have done and for most of them the decision turned out well. Many were apprehensive before going out on their own, anxious mainly about income security and negotiating a potential drop in income with their partners. Some were desperate to be their own boss, but their partner wouldn’t allow them. Mortgages and private school fees played a big role in many of the decisions we have witnessed. Our experience very much mirrors the research findings, the main driver we have seen over the years is clients telling us they have ‘nowhere to go’ in their current organisation. Dissatisfaction with advancement prospects and company culture were two of the main reasons we have heard over and over again. What we have not seen much of is people going back from self-employment into becoming employees again. The research says this is very common, but we have not seen many of our clients go back to ‘where they came from’. Once people adjust to the higher levels of uncertainty and lower wage expectations, the benefits of being your own boss can come to the fore and are very hard to give up.