A Shortage of Entrepreneurs

In a world that encourages and necessitates specialization, a phrase like "Jack of all trades, master of none" can have a derogatory connotation.

But a leading theory of the American Dream of entrepreneurship, conceived by Ed Lazear, the current Chairman of President Bush's Council of Economic Advisers, says people who start their own businesses tend to have strong abilities in a number of different areas. This comes in handy because, in order to survive, an entrepreneur must be able to fill the many different roles that help make a business profitable.

And being a Jack-of-all-trades entrepreneur comes with a nice pay off. In a new paper, Joop Hartog, Mirjam van Praag, and Justin van der Sluis of the University of Amsterdam show that an entrepreneur who is very able in a number of different areas earns 30 percent more than a salaried worker with the same set of abilities. (The earnings difference between more average humans is negligible.)

But while earnings for skilled entrepreneurs are indeed higher, merely possessing greater general abilities doesn't drive people into entrepreneurship. Using a survey which regularly tracked 4,500 teenagers and young adults through part of their adult lives from 1979 to 2000, the researchers found that a person with higher general abilities was no more likely to choose to start his/her own business than someone with lower general abilities. 

The researchers next looked at some of the components that make up general ability: social, mathematical, technical, language, and clerical skills. They found that people with exceptional technical, mathematical, and social skills earned a better living while language and clerical abilities helped salaried workers score better wages. Having higher technical and social abilities did predict that someone would become an entrepreneur, but good math and science skills did not.

That implies that there is underemployment in entrepreneurs, say the researchers. The fact that more people with exceptional general abilities which include math and science haven't decided to start their own business means either that this population is typically risk averse, or as the researchers argue, that the entrepreneur earnings premium "is not yet common knowledge or practice."