1 Introduction
Starting and running a new business venture can be a great source of personal fulfillment and satisfaction (Benz and Frey
2008b; Binder and Coad
2013; Cardon et al.
2012; Shir et al.
2019; Stephan and Roesler
2010). Unlike most traditional occupations, entrepreneurs typically enjoy freedom and control. This enables them to derive more meaning from their work, effectively cope with stress, and utilize their innate talents and skills (Shir et al.
2019; Stephan
2018; Wiklund et al.
2019; Wolfe and Patel
2019). Consequently, entrepreneurship is often viewed as a highly advantageous career, with over two-thirds of people reporting the desire to work for themselves (Parker
2019).
However, the process of starting and running a new business venture is rarely easy and straightforward. Many people who launch new companies terminate their efforts in less than a year (Katz and Gartner
1988; Reynolds et al.
2004; Shane
2008). Only a third of all new ventures have positive cash flow after 7 years (Shane
2008), and two-thirds of all start-ups fail within the first 10 years (Parker
2019). Business failure is pervasive and can not only lead to financial losses but also evoke emotions, such as grief, shame, and self-blame, and low self-esteem (Parker
2019; Shepherd
2003; Ucbasaran et al.
2013). These adverse outcomes can be particularly traumatic for entrepreneurs whose identity is tightly linked to their ventures (Rouse
2016).
This paper investigates the perceived life and health satisfaction costs of exiting self-employment.
1 A large body of literature has documented a wide range of nonmonetary rewards of being self-employed. For example, these include job and life satisfaction (Benz and Frey
2008a,
2008b; Hessels et al.
2018), lower stress (Hessels et al.
2017), health (Nikolova
2019; Stephan et al.
2020), and eudaimonic well-being (Nikolaev et al.
2020; Shir et al.
2019). These nonmonetary benefits are often attributed to the self-employed having higher levels of job control, autonomy, and utility from purposeful and self-directed work (Hundley
2001; Nikolaev et al.
2020; Shir et al.
2019). Consequently, the public policy recommendations of scientific papers often tout entrepreneurship as a means of enhancing both personal and social welfare. However, this paints a somewhat idealistic picture of the realities that many people who start new ventures go through.
Therefore, to provide a counterbalance to the well-being literature in entrepreneurship and help examine the potential trade-offs associated with starting and running a business, we pose the following questions: (1) What is the impact of exiting self-employment on perceived health and subjective well-being? (2) How do the perceived health and life satisfaction effects of exiting self-employment compare to losing a salaried job? (3) Is the impact of exiting self-employment persistent, or do people quickly adapt to this adverse event?
To answer these questions, we use rich longitudinal data from the German Socio-Economic Panel (SOEP), allowing us to track self-employed and salaried workers overtime. Our findings suggest that losing self-employment and becoming unemployed leads to a decline in psychological well-being. In subsequent analyses, we also show that this drop in life satisfaction is far more severe than the drop associated with losing a salaried job (i.e., switching from salaried employment to unemployment). At the same time, transitioning from self-employment to a salaried position can even be beneficial to life and health satisfaction. Finally, our results suggest that health and life satisfaction declines associated with business failure persist for 2 or more years after losing self-employment.
Our paper makes three contributions to the small business economics literature. First, unlike previous studies, which mostly focus on the positive effects of self-employment, we examine changes in both life and health satisfaction as a consequence of self-employment exits. As such, we build on and extend the work by Hetschko (
2016), which, to the best of our knowledge, is the only contribution concerning the psychological costs of losing self-employment in the economics literature to date. Specifically, Hetschko (
2016) shows that losing self-employment can lead to more substantial declines in life satisfaction than unemployment due to plant closings. We also compare and contrast the self-reported health and life satisfaction changes of those who involuntarily lose self-employment with those who involuntarily lose a salaried job.
Second, not all business exits are created equal. While some businesses may end up in bankruptcy, others may be liquidated because the founder had better job opportunities elsewhere. Even if the business fails, finding salaried employment can significantly alleviate the adverse effects of exiting self-employment by reducing the financial stress associated with unemployment and fulfilling basic psychological needs for structure, shared goals, social contact, status, and activity. Thus, transitioning from self-employment to salaried employment can significantly speed up the recovery process following after exiting self-employment, and, in some cases, even improve psychological well-being, which is a possibility we explore. As such, we consider transitions from self-employment to unemployment to be involuntary while transitions to a salaried job to be voluntary. Admittedly, this classification may appear crude because the survey does not explicitly ask respondents whether labor market transitions are voluntary. Nevertheless, our definition is consistent with traditional approaches to modeling entrepreneurship and job loss. One advantage of this approach is that it objectively defines various transitions, which makes it useful for analytical purposes (Fairlie and Fossen
2018).
Finally, several studies document that people are remarkably adaptable, and life satisfaction typically stabilizes after most life events and shocks (Graham
2011). We contribute to this line of research by studying if the adverse psychological well-being effects of losing self-employment are likely to persist or dissipate over time. In addition, we complement our analysis by exploring additional health and behavioral outcomes (e.g., sleep satisfaction, BMI, smoking, and drinking) that are relevant to the relationships we study.
2 Previous literature, theory, and hypotheses
A large body of literature suggests that job loss can lead to declines in both psychological well-being and physical health (Wanberg
2012). Specifically, being unemployed is linked with a range of stress-related outcomes, including depression, anxiety, low self-esteem, and physical ailments, such as pain and headaches, that can stifle people’s ability to function in their daily lives and even lead to suicide. The adverse well-being effects of an unemployment spell can be felt years later, long after workers are reemployed (Clark et al.
2001; Wanberg
2012).
Several theories have been proposed to explain the mechanisms behind unemployment’s negative consequences (Bartrum and Creed
2006). The most prominent theoretical perspective is Jahoda’s (
1982,
1987)
latent deprivation model. According to this theory, employment is a social institution providing both income-related
manifest benefits and
latent benefits related to fulfilling basic psychological needs. While people mostly work to obtain manifest benefits, work also fulfills five basic psychological needs—time structure, social contact, shared common goals, status, and activity—that are key for psychological well-being. Unemployment deprives people of both the manifest and latent benefits of work. However, it is mostly the loss of latent benefits that leads to lower psychological well-being. An extensive empirical literature supports, at least partially, Jahoda’s model (Bartum and Creed
2006).
Other theoretical perspectives such as the CoPES (Coping, Psychological, and Employment Status) model (Waters
2000) have identified a wide range of stressors related to job search, rejection, financial strain, relationship problems, and boredom that can further exacerbate the negative relationship between unemployment and psychological well-being. For example, Price et al. (
2002) argue that the severe financial strain associated with unemployment ultimately leads to feelings of helplessness, a lack of control, and depression, which, in turn, contributes to poor mental health over time.
Previous meta-analyses (McKee-Ryan et al.
2005; Paul and Moser
2009) suggest that the negative effect of unemployment on psychological well-being is non-negligible (Cohen
1992; Wanberg
2012). The proportion of clinically depressed people, for example, is twice as high among the unemployed compared with those who have full employment (Paul and Moser
2009). Of course, reverse causality and selection effects are critical empirical challenges with such studies. Specifically, individuals with poor psychological well-being may also be more likely to lose their jobs. However, several longitudinal studies using data on company closures—an involuntary job loss proxy—show that unemployment is
causally related to poor psychological well-being outcomes (Kassenboehmer and Haisken-DeNew
2009; Nikolova and Ayhan
2019; Paul and Moser
2009).
Similarly, many studies suggest that unemployment can negatively impact physical health, measured by self-reported health, health-symptoms checklists, and biochemical markers (Korpi
2001; Maier et al.
2006; Strully
2009). Unemployment can also lead to unhealthy behaviors such as smoking, drinking, and weight gain (Deb et al.
2011; Marcus
2014). Theoretically, the stress associated with unemployment can directly translate into physical symptoms (Wanberg
2012), increase the probability of mortality, and even lead to suicide (Platt and Hawton
2000). Unemployed people may also be unable to afford healthy food and quality health care so that any health conditions can go untreated for a long time.
Nevertheless, people with poor physical or mental health may be more likely to lose their jobs, which again points to reverse causality issues. Indeed, using US panel data, Strully (
2009) finds a significant positive correlation between poor health and subsequently being fired or leaving a job voluntarily. The study also suggests that unemployment is related to the deterioration of mental health beyond these selection effects. Compared with a reference group of people who had stable employment, for example, those who lost their jobs due to company closures were more likely to report poor physical health and an increase in the number of health conditions, such as hypertension, arthritis, or diabetes. Other studies support similar conclusions for symptoms, including chest pain, stomach aches, and backaches, aggregated in a health-symptoms index (e.g., Korpi
2001). Previous unemployment spells have also been correlated with higher levels of the stress hormone cortisol (Maier et al.
2006) and the c-reactive protein (CRP), a marker of inflammation, even 5 to 8 years after the unemployment spell occurred (Janicki-Deverts et al.
2008). Therefore, we expect that:
H1a:
An involuntary exit from self-employment to unemployment is associated with lower life and health satisfaction compared with staying self-employed.
H1a:
An involuntary exit from salaried employment to unemployment is associated with lower life and health satisfaction compared with staying employed in a salaried job.
The psychological well-being and health consequences of unemployment we discussed above are aggregated across individuals. However, many previous studies suggest that not everyone experiences unemployment in the same way (Gielen and van Ours
2014; Wanberg
2012). In this section, we argue that the negative well-being effects of unemployment are more substantial for those who transition from self-employment to unemployment compared with those who transition from salaried employment to unemployment.
Several risk factors and processes predict psychological well-being during unemployment (McKee-Ryan et al.
2005). Specifically, work centrality (i.e., how important is the work to the individual), cognitive appraisal (i.e., how individuals interpret the job loss), coping resources (i.e., the individual’s financial resources and social support), and coping strategies (i.e., the cognitive and behavioral strategies related to dealing with demands during unemployment) moderate the relationship between unemployment and psychological well-being. In this respect, individuals who have a higher sense of self-worth, perceived control, experience less financial strain, and do not strongly identify with their work are more likely to fare better during the unemployment spell and recover faster from the adverse experience (McKee-Ryan et al.
2005; Wanberg
2012).
From this perspective, the unemployment experience after a business exit (i.e., switching from self-employment to unemployment) can be especially damaging to psychological well-being relative to the experience of unemployment due to a loss of salaried employment (i.e., switching from salaried employment to unemployment). First, there is a strong emotional connection between entrepreneurs and their businesses. Most entrepreneurs see their work as central to their lives, future aspirations, and personal growth and development. In fact, many entrepreneurs are passionate about their ventures beyond the mere potential for financial gain (Cardon et al.
2012). For example, entrepreneurs often view their ventures as their “baby” (Wasserman
2008). Therefore, the potential loss of something central to one’s life can be particularly damaging to one’s psychological well-being.
Furthermore, research indicates that founders often form deep identity connections with the ventures they start as they pour time, energy, passion, hopes, and resources to nurture their organizations’ future growth (Cardon et al.
2012; Rouse
2016). These deep connections make it especially difficult to psychologically disengage during exit events, which can significantly destabilize the founder’s identity (Rouse
2016; Cardon et al.
2012). Losing self-employment, for example, is more strongly correlated with feelings of personal failure and deviation of one’s ideal self, compared with losing salaried employment (Hetschko et al.
2014).
Appraising the situation as a personal rather than a professional loss may also lead to greater feelings of grief, shame, humiliation, guilt, self-blame, distress, and severe anxiety compared with those who lose their salaried employment (Shepherd
2003; Shepherd et al.
2009a,
b). This negative emotional response can significantly hinder people’s ability to learn from failure and harm their self-efficacy, self-worth, and perceived life control (Shepherd
2003). Thus, because it is more difficult to separate professional from personal failure, as the identity of the entrepreneur is often closely tied to the business, people who enter unemployment after a business loss may be more likely to fare less well psychologically compared with their counterparts who transition to unemployment from salaried employment. The magnitude of the drop in psychological well-being following a self-employment exit may be higher than that of losing a salaried job, even if both groups end up at the same level of subjective well-being as unemployed (Hetschko
2016). This is because the self-employed workers have higher ex-ante well-being levels than salaried workers (Benz and Frey
2008a).
Finally, business failure can lead to substantial financial losses that exceed the declines in income associated with losing a salaried job. Self-employed people are more likely to run into debt and are less likely to receive unemployment insurance benefits than their counterparts in salaried employment (Hetschko
2016; Parker
2019). In addition, the most common source of start-up capital is the entrepreneur’s own savings (Parker
2019; Shane
2008). Losing these savings as a result of business failure can deprive entrepreneurs and their families of essential financial resources during the unemployment spell. It can also increase financial strain and feelings of insecurity, further exacerbating the psychological damage of unemployment and making coping with the adverse situation more difficult and prolonged.
In some countries, failed entrepreneurs can also face significant social stigma for many years, which can further prolong the recovery process (Armour and Cumming
2008; Simmons et al.
2014). Consequently, a longer recovery period may be necessary for failed entrepreneurs to bounce back (adaptation to the adverse situation) relative to people losing salaried jobs.
Therefore, we expect that:
H2a:
The negative life and health satisfaction impacts associated with unemployment are stronger for people who transition from self-employment compared with those who transition from salaried employment.
H2b:
Adaptation to unemployment (the recovery process) is longer for self-employed people compared with their salaried counterparts.
As we argued above, involuntary business exits can have a pervasive and long-lasting negative effect on the psychological well-being and physical health of the founder. However, not all self-employment exits are involuntary. Businesses can be liquidated as a result of a successful acquisition, desired career change, retirement, or some other life event such as a relocation (Coad
2014; Jenkins and McKelvie
2017). Therefore, not all self-employment exits will be appraised as stressful events and lead to negative emotional and health responses (Byrne and Shepherd
2015; Jenkins and McKelvie
2017; Jenkins et al.
2014). Just like people in salaried employment can change jobs and careers to pursue better opportunities for personal growth and development, self-employed people may also voluntarily seek alternative forms of work to improve their lifestyles and well-being. Specifically, voluntary salaried job changes can enhance psychological well-being, at least in the short run (Chadi and Hetschko
2018). Studies in organizational psychology, for example, theorize and find evidence for the so-called
honeymoon-hangover effect, whereby job satisfaction is higher for individuals who transition from one salaried employment to another within the last year (i.e., the honeymoon effect). Still, this positive effect disappears in subsequent years (i.e., the hangover effect) (Boswell et al.
2005). In turn, higher levels of job satisfaction can positively spill over to physical and mental health (Faragher et al.
2005) and overall life satisfaction (Judge et al.
1998; Judge and Watanabe
1993).
As Bates (
2005, p.345) explains, “departure requires only that a superior alternative has become available to the entrepreneur.” In that case, it may be reasonable to expect that self-employed people, especially those with high human capital, may voluntarily enter salaried employment if the opportunity cost of keeping the business in operation is too high (Coad
2014; Grilli
2011).
Since entrepreneurs often face high uncertainty, long working hours, time pressure, role conflicts, and ambiguity, starting and running a business can be a significant source of stress (Patzelt and Shepherd
2011; Wincent and Örtqvist
2011). The idea that entrepreneurship is one of the most stressful occupational choices is “ubiquitous” (Uy et al.
2013). While other occupations can undoubtedly be stressful as well, entrepreneurs “lack resources, often work alone, lack support from colleagues, and must bear the cost of their mistakes while fulfilling lots of diverse roles such as recruiter, spokesperson, salesman, and boss” (Cardon and Patel
2015). Thus, voluntary transitions from self-employment to salaried employment can, in some cases, lead to improved psychological well-being and health outcomes, especially for those who may find it challenging to cope with the increased demands and stress of being your own boss.
Transitioning from self-employment to salaried employment can significantly alleviate the financial strain and psychological distress that immediately follow the business exit by providing founders with a new source of income and fulfilling basic psychological needs for time structure, social contact, shared common goals, status, and activity. For example, in a sample of 256 entrepreneurs who filed for bankruptcy, Jenkins and McKelvie (
2017) found that while about 80% of entrepreneurs reported being considerably or somewhat worse after transitioning to unemployment, close to 40% of self-employed people who transitioned to salaried employment reported being considerably better off, somewhat better off, or neither better nor worse off.
However, self-employment transitions, even when voluntary (i.e., switches from self-employment to salaried employment), may have negative well-being consequences for the reasons we outlined earlier. For instance, founders may have a difficult time letting go of their business even when the exit is a result of a successful acquisition (Rouse
2016). Similarly, Ronstadt (
1986) found that most founders who either sold or liquidated their business described their self-employment careers as “financially disappointing” (p. 335).
Taken together, the evidence above leads to our last hypothesis:
H3:
Voluntary transitions from one salaried job in the private sector to another one result in higher positive psychological well-being and perceived health benefits relative to changes from self-employment to salaried employment.
7 Discussion and conclusion
The entrepreneurship literature has so far mainly focused on the well-being benefits of starting and running new business ventures. A growing body of work suggests that self-employed people enjoy several advantages, such as autonomy, competence, and meaning that can lead to higher levels of job satisfaction. However, the implications of these findings may paint an overly optimistic picture of what it means to be “your own boss.” After all, the vast majority of new businesses fail, implying that business exits are a common experience.
Our paper contributes to the literature on entrepreneurial well-being by focusing on the underwhelming but widespread experience of business failure. We utilize rich longitudinal data tracking the careers and well-being of individuals over time. Specifically, we study the life and health satisfaction associated with business exits. We not only explore involuntary self-employment exits (i.e., transitions from self-employment to unemployment) but also consider how psychological well-being and health satisfaction change after voluntarily transitioning to salaried employment following a business exit. Finally, we compare the subjective well-being consequences of exiting self-employment to those associated with similar transitions from salaried employment. Such insights are equally important when assessing the potential returns from starting a new business. They can be particularly relevant for public policy, especially that small business activity is highly valued and supported by governments around the world.
Our findings suggest that the life and health satisfaction of the self-employed decrease drastically if the business exit is followed by an unemployment spell. Compared with previous studies documenting mental and sometimes physical health gains of switching to self-employment (Nikolova
2019), our results indicate that the potential well-being costs of business failure can be much larger than the benefits from starting a new business venture. For many people, fear of failure is a significant obstacle to starting a business (Cacciotti et al.
2016). This fear of failure may, in part, be informed by the high rates of business exits and the negative emotions they trigger. This can explain why even though many people prefer working for themselves, only a small fraction of people take a leap in starting new ventures, especially in the developed world where salaried employment presents a viable alternative (Parker
2019).
Our results also suggest that the psychological costs of business failure significantly exceed the costs of involuntary loss of a salaried job, implying that the unemployment experience is particularly psychologically damaging for those losing self-employment. Even more importantly, the well-being costs of business failure can be long-lasting and scarring. Specifically, we find that life satisfaction does not recover even 2 or more years after a business exit that leads to unemployment. Meanwhile, transitioning to private sector employment brings mild improvements in psychological well-being and health satisfaction, both for those who leave self-employment and for those who switch from one private sector job to another. This implies that finding alternative salaried employment can cushion the psychological costs of business failure. In this respect, public programs directed at helping failed entrepreneurs integrate quickly into the labor market can lead to significant welfare gains.