Canada – The differences between self-employed and business owners

Entrepreneurial activity has long been argued as an important driver of innovation, job creation, and productivity growth. However, measuring entrepreneurial activity is not easy. Traditionally, many studies have approximated entrepreneurship with a broadly defined measure that includes a heterogeneous group of individuals. They include self-employed workers such as commission salespersons, professionals running unincorporated firms such as doctors and lawyers, and owners of corporations.

The incorporated self-employed are a large and important group of entrepreneurs.

Incorporated firms are typically larger enterprises than those in the unincorporated sector, employing more people, using more capital per worker, and having much higher output per worker. However, incorporated self-employment has not received much attention in the literature. Using a newly developed administrative database of firms and workers, the Canadian Employer–Employee
Dynamics Database (CEEDD), over the period from 2001 to 2013, this paper distinguishes
incorporated self-employment from unincorporated self-employment, and compares the entry and exit dynamics of the two types of self-employment by age, gender and province. The large number of observations in CEEDD and its longitudinal nature make this detailed analysis possible.
This paper finds that self-employment (the unincorporated) and business ownership (the incorporated) are different from each other. Business ownership is more male-dominated than self-employment. The vast majority of business owners are employers while only a small percentage of the self-employed have employees. Business owners also receive much higher income from their endeavour than the self-employed.

Moreover, business owners and the self-employed have different entry and exit processes. Specifically, the self-employed have higher entry rates and exit rates than business owners. Self-employment is dominated by short-term entry (i.e., less than one-half of all entrants to self-employment survive for longer than two years after entry). In contrast, business owners are dominated by long-term entry. That is, about 63% of all entrants to business ownership can survive at least three years.

For both self-employment and business ownership, males had higher entry rates and lower exit rates than females. However, the male–female difference in the entry and exit rates became smaller over time, especially for self-employment. The entry rates by age into both self-employment and business ownership follow an inverted U-shape. They are lowest for those aged 15 to 34, increase to a peak for the 35-to-54 age group, and then decline for those aged 55 and older. By contrast, the exit rate is highest for the youngest age group and lowest for the oldest age group. As well, important regional variations exist, especially with respect to entry rates: the western regions have higher entry rates, while the central and eastern regions have lower rates.

Self-employment and business ownership also differ in terms of the origin of entries. While the entry from paid employment is the largest entry source for both business ownership and self-employment, the transition from self-employment is the second-largest source of entry for business ownership, and the transition from non-employment is the second-largest source of entry into self-employment. Men are more likely than females to enter either self-employment or business ownership from paid employment, and less likely than females to enter from non-employment. Also, the share of entrants into both self-employment and business ownership from paid employment decreases with age, while the share of entrants from non-employment increases with age. The shares of entrants making transitions between self-employment and business ownership also increases with age.

Chosen excerpts by Job Market Monitor. Read the whole story at The entry into and exit out of self-employment and business ownership in Canada