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Small Business Economics

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01.04.2008

Intergenerational correlation in self employment: some further evidence from French ECHP data

verfasst von: Nathalie Colombier, David Masclet

Erschienen in: Small Business Economics | Ausgabe 4/2008

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Abstract

Previous empirical work has shown that self-employment is correlated across generations, so that the children of the self-employed are themselves more likely to be self-employed. However, the reason for this intergenerational correlation remains unclear. This paper contributes to the existing literature in two ways. First, using French data from the European Community Household Panel Survey, we provide a further examination of this intergenerational correlation among the self-employed. In particular we investigate to what extent the intergenerational correlation in self-employment reflects occupational following. The second contribution of our paper is to investigate the differences between first- and second-generation self-employed workers and their possible explanations. Even though our results indicate that having self-employed parents increases the probability of being self-employed, irrespective of occupation, we do observe that a large majority of individuals enter the same (or very similar) occupation as their parents, which is consistent with occupational following. Our results also reveal some differences between the first- and second-generation self-employed. Formal education is more important for the first-generation self-employed (those whose parents are not self-employed) than for the second-generation self-employed. Further, the first-generation self-employed, who received less informal human capital than the second-generation self-employed, compensate for this shortcoming by acquiring more formal education.

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The conclusions regarding human capital depend on the nature of this capital. While general human capital seems to have little to no effect on self-employment, there is more doubt about the role of more specific human capital (work experience for example). Evans and Leighton (1989) and de Wit and van Winden (1989) find a negative effect of work experience, while Rees and Shah (1986), Evans and Jovanovic (1989) and Dolton and Makepeace (1990) report a positive and significant effect.

In this study, we consider a restricted definition of the immediate social environment, focusing on the influence of parents (mother and father) only.

In their study, Dunn and Holtz-Eakin (2000) do not distinguish general human capital from specific human capital.

This result is consistent with Aldrich et al. (1998) who found that a small number of the self-employed helped their self-employed children, by transferring physical or financial capital. Finally Basu and Parker (2001) found that family credit markets may substitute for formal access to funds.

The ‘entrepreneurial inheritance’ effect is captured by a dummy for father self-employed. The ‘vocational inheritance’ is captured by a variable ‘percent self-employed’ that accounts for the effect of having a father in an occupation that is inherently more or less prone to self-employment; it is also reflected in a dummy (paternal entrepreneurial occupation) indicating whether the father is in an occupation requiring management or leadership activities. Finally, family income captures the economic inheritance.

General managerial skills include skills that are required in most of all occupations in self-employment : communication skills, aptitude to decide by oneself, leading skills and all sort of other general aptitudes. We recognize that parents may also transmit tastes for these activities; however, we do not aim here at disentangling these different factors as well as distinguishing between tastes and skills but rather investigate to what extent the intergenerational correlation in self-employment reflects occupational following (see Dunn and Holtz-Eakin 2000 for an interesting discussion on this point).

‘Specific-career skills’ and ‘general managing skills’ do not exactly match the variables used in Hundley (2006) to capture vocational and entrepreneurial inheritance. The vocational effect only captures the part of occupational inheritance that results from having a father in an occupation that is inherently (more or less) prone to self-employment, but does not measure the part of the inheritance from the parent being in the same occupation as her/his children. Moreover, the ‘vocational inheritance effect’ includes both transmissions of ‘specific-career skills’ and transfers of ‘general managing’, since it includes having a parent in occupations involving management or leadership activities.

Our study differs from the studies above in two ways. First, in contrast to previous studies and in particular to Hundley (2006), we do not consider the effect of family background in general, but rather focus our attention on the effects of having self-employed parents, seeking to investigate to what extent the intergenerational correlation in self-employment merely reflects occupational following. Second, our paper considers the two following issues that earlier work has not addressed. The first is if it matters whether the father or the mother was self-employed: Are intergenerational transmissions stronger along gender lines? Previous work has focused on men only and/or on the effects of having a self-employed father. The second issue is differences between occupations, so that skills may be more transferable between some occupations than others. For example, the impact of human capital transfers through paternal self-employment in farming may increase the probability of becoming a self-employed artisan or farmer, but have little to no impact on the probability of becoming a self-employed professional or shopkeeper. We thus estimate regressions which take into account each self-employment occupation. Contrary to previous work which generally excludes farmers, we include farming, which is typically a self-employed occupation but can also be salaried. We also ran regressions excluding farmers: this produced similar results to those obtained previously.

All individuals living in these households and aged 17 or over in 1994 were interviewed periodically between 1994 and 2001. These “panel individuals” were followed over time even if they changed address.

An individual is count as self-employed in a given survey year if she or he declared herself (himself) as self-employed worker. Her or his “class of worker” category includes non salaried farmer, shopkeeper, artisan, professional man or managers/owner. Business owners who draw a regular salary are classified as salaried workers.

Personal income was initially measured in French Francs. Two income information were available in the French data of the ECHP survey. First, the French panel of the ECHP Survey interviewed in October of each year between 1994 and 2001 the same group of persons representative of the French population on their cumulated personal income at this date (i.e. October of each year between 1994 and 2001). Second, all individuals were also asked every year to retrospectively state their annual income of the past year (e.g. 2000 for the survey conducted in 2001). However, such information prevented us from using data for 2001. For this reason, we used the first income information in this study. To make easier comparative analysis and to provide less ambiguous income information, we reported monthly income. The net monthly income from self-employment is on average 2,229 Euros, compared to 1,603 Euros for employees. Individuals who reported non-positive self-employment earnings were not considered in the analysis (Evans and Jovanovic 1989).

A similar result is obtained by Dunn and Holtz-Eakin (2000). The authors observe that self-employed sons followed their father’s occupations in 32% of cases compared to a rate of 22% for the never self-employed sons.

Whereas it is possible to test the nature of the individual effect (fixed or random) for linear models, it is much more difficult to do so with a qualitative dependent variable (See Greene 2003). With a binary dependent variable we can use a logit with individual fixed effects which produces convergent estimations. However with a probit model, estimates are convergent only when the individual effects are random. Since one of our goals is to jointly estimate the impact of variables that remain constant over time (e.g. education) and those that vary over time (e.g. whether and when the individual left the parental home, and the number of children) we use a probit with random effects.

The key question in the survey is “How much have you inherited from another person”. The omitted category is “no/low heritage received”.

Additional regressions (not reported here) including the variables concerning non immediate environment (friends and neighbors) do not report highly significant effects of these variables.

For example, the father may be a salaried agricultural worker while his child is a self-employed farmer.

The majority of the literature concludes that men are significantly more likely to become self-employed (Lindh and Ohlsson 1998; Blanchflower and Oswald 1990; Dolton and Makepeace 1990; De Wit and van Winden 1989; and Carrol and Mosakowski 1987), as are older workers (Holtz-Eakin et al. 1994a, b; Dolton and Makepeace 1990; Borjas and Bronars 1989; and Rees and Shah 1986). However, Taylor (1996) finds no significant effect of age.

There is no clear consensus on the effect of marriage. Evans and Jovanovic (1989), Evans and Leighton (1989) and Gill (1988) report a negative effect of marriage on the probability of self-employment, while Taylor (1996) and Lindh and Ohlsson (1998) find positive effects. This latter result may show that being married brings more stability and relaxes the liquidity constraint. Nevertheless, most of the other studies find no significant marriage effect. The effects of having children are also not well established. Gill (1988) report a negative effect, while Dolton and Makepeace (1990) find a positive and significant effect.

We also ran a regression (not reported here) including “assets” to control for personal wealth. Asset possession increases the probability of self-employment. Details of this regression will be provided on request.

It might be argued that the variable “inheritance” may not be entirely random. Blanchflower and Oswald (1998) note that individuals who receive inheritances may be those who are, for unmeasured reasons, better suited for self-employment. For example, inheritance may release the borrowing constraint of children. Children who attempt to go into business may approach their parents for loans, which may induce simultaneity bias. To control for this possibility, Blanchflower an Oswald (1998) instrumented this variable, by using the information concerning the death of the father and/or the mother since the death of a parent should have no effect on the decision of self-employment. Unfortunately, such information was not available in our data. However, we can be confident in the consistency of our results since Blanchflower and Oswald observed similar positive effects of inheritance with and without instruments and concluded that the effects of inheritance could not be created by simultaneity bias. Finally, we also ran estimations without “inheritance”. The results are similar to those presented in Table 2. Details of this regression will be provided on request.

Additional regressions (not reported here) including the variables “Father same job” and “Mother same job” also produced similar results.

For example, a possible distinction could be made between manual occupations (farming, artisan) and non manual jobs (professional workers for example). Shopkeepers would then enter a third category since these occupations include both manual and non manual activities.

The results of a Hausman test confirm the IIA assumption in all sub-samples.

We also re-estimated the regressions in Table 2, taking into account father’s occupation. A first model tests whether having a self-employed farmer father influences the probability of becoming a self-employed worker for all occupations except farmers. The three other models exclude respectively artisans, shopkeepers and professional workers. Our results indicate that, in all cases, father’s occupation is positive and significant, even for the occupations that have been omitted. Details of these regressions will be provided on request.

We recognize here that there may exist other possible explanations for these differences. However, we are confident in our results, since they indicate that our two effects tend to capture most of the distance between the first- and second-generation self-employed.

The IIA assumption is confirmed in all sub-samples.

Under a larger definition of occupational following, we may consider that it also reflects the fact that individuals enter not only the same occupations as their parents but also occupations that are quite similar.

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Titel: Intergenerational correlation in self employment: some further evidence from French ECHP data
verfasst von: Nathalie Colombier
David Masclet
Publikationsdatum: 01.04.2008
Verlag: Springer US
Erschienen in: Small Business Economics / Ausgabe 4/2008
Print ISSN: 0921-898X
Elektronische ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-007-9059-9

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