A new GLO Discussion Paper shows that transitioning from self-employment to salaried employment brings small improvements in health and life satisfaction, but the negative psychological costs of business failure are substantial and exceed the costs of involuntarily losing a salaried job.
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GLO Discussion Paper No. 527, 2020
The Perceived Well-being and Health Costs of Exiting Self-Employment – Download PDF
by Nikolova, Milena & Nikolaev, Boris & Popova, Olga
Author 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 selfreported 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.
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