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Small Business Economics

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26-02-2018

Returns to balance in cognitive skills for the self-employed: evidence from 18 countries

Authors: Pankaj C. Patel, Yoav Ganzach

Published in: Small Business Economics | Issue 1/2019

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Abstract

Is there a positive contemporaneous association between balance in cognitive skills and self-employment earnings? In this paper, we extend past studies that draw on balance in cognitive skills tests administered at an early age and use the balance in scores on cognitive skills tests administered during 2011–2012 in the Programme for the International Assessment of Adult Competencies (PIAAC), a cross-sectional sample of 47,768 adult participants from 18 countries. Lowering concerns for cognitive skills measured at an early age, PIAAC’s measure of cognitive skills provides a contemporaneous measure of cognitive skills also accumulated through past experiences. Using a standardized measure of cognitive skills across participating countries, PIACC also lowers concerns for measurement error resulting from cultural bias in country-specific cognitive skills tests. Extending the entrepreneurship earnings puzzle—lower average income for the self-employed relative to wage earners—a greater balance in cognitive skills among the self-employed helps close earnings gaps with wage earners. However, balance in cognitive skills is not associated with self-employment. The implications of the findings are discussed.

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The exceptions are Hartog et al. (2010) and Alden et al. (2017) who used coefficient of variance and standard deviation respectively, and also drew on JAT as their theoretical framework.

The three cognitive skills used in the study are literacy, numeracy, and problem-solving skills. From Hanushek et al. (2015, p. 108), literacy refers to the “ability to understand, evaluate, use and engage with written texts to participate in society, to achieve one’s goals, and to develop one’s knowledge and potential.” Numeracy skills refer to “ability to access, use, interpret, and communicate mathematical information and ideas in order to engage in and manage the mathematical demands of a range of situations in adult life.” Problem-solving skills were measured in technology-rich context so as to assess the “ability to use digital technology, communication tools and networks to acquire and evaluate information, communicate with others and perform practical tasks.”

While our study is not directly related to JAT theoretical framework, the notion of balance in experience and skills has been explored in the samples from the USA (Hartog et al. 2010; Lazear 2004), Germany (Tegtmeier et al. 2016; Wagner 2003, 2006; Lechmann and Schnabel 2011; Stuetzer et al. 2012), Italy (Silva 2007), or Canada (Åstebro and Thompson 2011).

1—elementary occupation; 2—semi-skilled blue collar; 3—semi-skilled white collar; 4—white collar

The effects are consistent for elementary occupations, semi-skilled white collar, and white collar, however, not significant for semi-skilled blue-collar self-employed.

Test items for literacy test are available at: https://nces.ed.gov/surveys/piaac/sample_lit.asp

Test items for numeracy test are available at: https://nces.ed.gov/surveys/piaac/sample_num.asp

Test items for problem-solving test are available at: https://nces.ed.gov/surveys/piaac/sample_pstre.asp

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Title: Returns to balance in cognitive skills for the self-employed: evidence from 18 countries
Authors: Pankaj C. Patel
Yoav Ganzach
Publication date: 26-02-2018
Publisher: Springer US
Published in: Small Business Economics / Issue 1/2019
Print ISSN: 0921-898X
Electronic ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-018-0018-4

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