Who Enters and Who Builds Employer Firms? Prior Earnings and Entrepreneurial Selection
Using Swedish administrative data, this paper demonstrates that while business entry is more common among individuals with lower prior earnings, the likelihood of founding a persistent, high-growth employer firm is positively correlated with prior earnings, a relationship that remains robust even after controlling for a comprehensive set of wealth, skills, and experience characteristics.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
Entrepreneurship is often imagined as a single, dramatic moment: the decision to leave a steady job and start a business. In the world of economic research, this decision is frequently used as the primary measure of who becomes an entrepreneur. However, this single snapshot can hide a crucial second chapter. Many new businesses are small, short-lived, and never hire anyone beyond the founder. A much smaller group of these ventures survives, grows, and becomes a source of jobs for others. These "employer firms" are the engines of early job creation, yet they are not necessarily started by the same people who simply open a shop. Understanding who builds these lasting companies, and what distinguishes them from those who start businesses that quickly fade, requires looking beyond the initial launch.
Researchers have long wondered if the path to a successful, job-creating company is paved with specific traits like high intelligence, vast savings, or a family history of business. To answer this, a team of economists turned to a massive, detailed record of life in Sweden. They did not rely on surveys or self-reported stories, which can be incomplete or biased. Instead, they used linked government records that track the entire lives of millions of people, from their wages and education to their military test scores and the financial accounts of the companies they eventually founded. This allowed them to see not just who started a business, but who built a business that lasted three years and employed at least five people, including the founder.
The study focused on a simple but revealing question: does the amount of money a person earned in their previous job predict whether they will start a business, and if so, whether that business will grow into a significant employer? The researchers looked at millions of Swedish men between the ages of twenty and fifty-five. They sorted these individuals into groups based on how much they earned before they ever considered starting a company. They then watched to see who entered the world of entrepreneurship and, among those who did, who went on to build a firm that survived and hired a team.
The findings revealed a striking reversal in the patterns. When looking at the initial decision to start a business, the people most likely to take the leap were those who had earned the least in their previous jobs. Individuals in the lowest earning groups were significantly more likely to become entrepreneurs than those in the middle or upper income brackets. This suggests that for many, starting a business is a move made when the alternative—staying in a low-paying job—offers little security or future.
However, the story changed completely once the researchers looked at what happened after the business was started. Among the people who actually founded a company, the pattern flipped. Those who had earned the most in their previous jobs were far more likely to build a firm that survived for three years and employed at least five people. In fact, founders from the highest earning group were about fourteen percentage points more likely to create such a persistent employer firm than those from the middle-income group. Conversely, founders from the lowest earning group were significantly less likely to build a lasting employer business. The companies started by high earners also tended to be larger, hold more assets, and produce more value per worker in their early years.
A critical part of the research was determining whether these results were simply because high earners also happened to be smarter, richer, or more experienced. The researchers controlled for a vast array of factors that are often thought to drive entrepreneurial success. They accounted for the founders' net wealth, their holdings of risky investments, their scores on cognitive and personality tests taken during military service, their previous experience in management or business, and even whether their parents had been entrepreneurs. Even after stripping away all these specific characteristics, the connection between high prior earnings and the creation of a successful employer firm remained strong.
The data showed that knowing a person's prior earnings explained about four times as much of the variation in who builds a lasting employer firm as all the other measured characteristics combined. This suggests that a person's previous salary acts as a compact summary of their potential. It captures a mix of skills, networks, and opportunities that are difficult to measure directly but are highly valued by the market. While a high salary does not guarantee success, and a low salary does not guarantee failure, the researchers found that the market price of a person's previous work is a powerful predictor of whether they will build a company that employs others.
The study also confirmed that these patterns hold true even when looking at different definitions of success, such as firms that survive with just two employees instead of five, and that the general trend applies to women as well, though the gap between high and low earners is slightly smaller for female founders. The researchers were careful to note that their work identifies a strong association, not a cause-and-effect rule. They did not prove that giving someone a raise would make them a better entrepreneur, nor did they claim that low earners cannot build great companies. Rather, they demonstrated that the two stages of entrepreneurship—starting a business and building a lasting employer—are driven by different forces.
Ultimately, the research paints a clearer picture of the entrepreneurial landscape. It shows that counting only the number of new businesses gives an incomplete view of who is creating jobs. The people who are most likely to start a business are often those with the least to lose, but the people most likely to build a business that grows and hires others are often those who were already doing well in the workforce. By separating the act of entry from the act of building, the study reveals that the path to creating a thriving, job-generating company is distinct from the path to simply becoming self-employed.
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