Youth Self Employment:
Its Nature and Consequences
Donald R. Williams
Small Business Economics
23: 323–336, 2004.
2004 Kluwer Academic Publishers. Printed in the Netherlands.
ABSTRACT. This paper examines the extent of self-employ-
ment, characteristics of the self-employed, and the returns to
self-employment experiences for a sample of teenagers and
young adults in the United States. Using data from the
National Longitudinal Survey of Youth, we find that the self-
employment experience of youth is quite different from that
of adults. Consequences of youth self-employment, measured
at age 27, suggest both positive and negative effects.
The rate of self-employment throughout much of
the industrialized world has stabilized or decreased
in recent years, after at least a decade of steady
growth in some countries.
In the United States,
many policymakers in the 1990s sought to
encourage continued growth in self-employment,
for a variety of reasons. There is interest in “small
business” as a source of economic (or employ-
Self-employment is also viewed as
a vehicle for exit from poverty, particularly for
women and racial minorities, and it has been
viewed as a viable alternative to unemployment
for displaced workers (Balkin, 1989; U.S.
Department of Labor, 1992). Self-employment is
also regarded as a solution to unemployment
problems in general (OECD, 1995).
Self-employment has also been proposed as a
solution to youth unemployment problems.
Individual governments have developed programs
to assist youth in the formation of new enterprises,
through financial assistance or specialized
training, in both developed and developing coun-
tries including Germany, Great Britain, Italy,
India, Bangladesh, Botswana and Zambia, among
others. In addition, international organizations
such as the ILO, which has historically supported
small enterprise development with the goal of
creating new and better employment opportunities
in the developing world, are proposing small
enterprise development as a component of youth
unemployment policy initiatives (ILO, 1999).
Recent evidence suggests there are potential
losses or costs associated with self-employment,
however, such that strategies to promote it may be
counterproductive. The failure rate among new
enterprises in the first year is very high.
United States, for example, more than one-fourth
of self-employed individuals return to the “wage
and salary” (or “paid employment”) sector to work
for others in any given year (and many of the self-
employed leave the labor force altogether). The
failure rates in developing countries are even
higher. The evidence suggests that the ex post
returns to self-employment among these
“returnees” is not always as high as the returns to
wage and salary sector employment. Williams
(2000) reports that, for women, spells of self-
employment have negative earnings effects among
those who return to the wage sector. The argument
is that while out of the wage and salary sector,
these workers lose potentially valuable labor
market experience and opportunities for training
or advancement within the firm. For those who are
successful in self-employment, the increased
income or non-pecuniary rewards that can be
gained in self-employment may outweigh these
costs. For those who are not successful, however,
the costs may outweigh any gains that exist during
the self-employment spell. Despite the potentially
important consequences of leaving the wage labor
market, the question of the long-term impacts of
self-employment on workers has not received
much attention in the economics literature.
Final version accepted on October 9, 2002
Department of Economics
Kent State University
Kent, OH 44242