The long‐term consequences of entrepreneurship: Earnings trajectories of former entrepreneurs

Research Summary Previous literature has documented a large short‐term earnings gap for entrepreneurs that return to the wage sector. Using matched employer–employee data from the Belgian Labor Market & Social Protection Database, we document how this initial gap is remarkably persistent. Former entrepreneurs earn 27% less than propensity‐scored matched controls 5 years after returning to wage work, which is almost unchanged from the short‐term earnings drop. About 60% of this gap results from reductions in hours worked while the remaining 40% is due to reductions in the wage rate. We offer evidence that the decline in hours worked is a choice of former entrepreneurs and therefore reflects a compensating differential, while the decline in the wage rate is a penalty resulting from statistical discrimination by employers. Managerial Summary While previous work recognizes that entrepreneurs experience reduced earnings when they return to the wage sector, little evidence exists about the long‐term consequences of a spell of entrepreneurship. Using detailed administrative data from a large sample of Belgian entrepreneurs and wage employees, we document an earnings gap of about 27% compared with observationally equivalent employees 5 years after returning to wage work. About 60% of this earnings gap results from a reduction in hours worked, and this part appears to be the result of individual choices. The remaining 40% of the earnings gap is due to a decline in the wage rate, and this part appears to be imposed on returning entrepreneurs by employers.