Self-employment can be good for your health

Despite long working hours and high work pressure, entrepreneurs and the self-employed frequently boast high job satisfaction because of the autonomy and the interesting work that often come with being one’s own boss. Yet, we know much less about how self-employment affects entrepreneurs’ physical and mental health. This is unfortunate because it severely limits our understanding of the nonmonetary benefits and costs of entrepreneurship, as well as its challenges and promises.

Entrepreneurs’ contributions to job creation, innovation, and creativity are key to social progress and economic growth. By contributing to individual and collective empowerment and well-being, entrepreneurship can help promote social cohesion, resilience, sustainability, and inclusion. Therefore, understanding the causes and consequences of entrepreneurship is key to designing innovative strategies to achieve social progress. Most importantly, if entrepreneurship is conducive to health, policy instruments that encourage entrepreneurship such as start-up grants can also indirectly improve health outcomes in society.

In a recent paper published in the Journal of Business Venturing, I offer the first causal evidence on the health consequences of switching to self-employment. Using German survey data tracking individuals and their careers over time, I find that becoming one’s own boss improves the mental health of those who were initially unemployed and of individuals who were formerly full-time employees. In Germany, self-employment is about 10 percent of total employment and about 5 percent of the population is the owner/manager of a new business or in the process of starting one.

I show that “opportunity entrepreneurs”—workers who switched from 9-to-5 jobs to self-employment—also improved their physical health. However, “necessity entrepreneurs”—individuals who switched from unemployment to self-employment—did not see a change in physical health as a result of becoming their own boss (Figure 1). Mental health gains, meanwhile, are bigger for those escaping unemployment than for those switching from regular jobs. This is not just because they avoid the stigma of being unemployed but also likely because they get an identity boost from being self-employed.

To better understand whether these mental health improvements are due to self-employment or working per se, I also studied transitions from unemployment to regular employment. Indeed, switches to self-employment lead to higher increases in mental health compared to moving to a job in the private sector. Given the large psychological costs of unemployment, it is reassuring to know that self-employment provides not only a livelihood but also psychological health gains to those who escape the misery of joblessness.

My findings are based on comparing the before-and-after health outcomes of people who switch to self-employment (treated group) with those of individuals who remain in the original labor market state (either unemployment or regular employment). Before undertaking the before-and-after comparisons, I use statistical matching to ensure that the groups of those who switch into self-employment and those who remain in the original labor market state are as similar as possible regarding characteristics such as age, gender, education, family circumstances, and even pre-treatment health outcomes. The rich longitudinal information in my dataset allows me to conclude that my findings are not due to personality and risk preferences or changes in income and working conditions. I also rule out that the results are due to relatively healthy individuals starting a business and that the health benefits of self-employment are indeed due to self-employment and not to the excitement about the new job.

Figure 1: Mental and physical health changes due to switching to entrepreneurship

Source: Nikolova (2019) based on estimations from the German Socio-Economic Panel (SOEP), 2002-2014.

Notes: This figure illustrates the estimated changes in individual self-reported physical and mental health following the switch from unemployment to self-employment (left panel) and regular employment to self-employment (right panel) based on difference-in-differences estimations (with 95% confidence intervals). The Mental Component Scale and the Physical Component Scale are based on the SF-12 questionnaire, which is a valid and reliable survey instrument for eliciting health information. The Mental Component Scale is a weighted combination of variables measuring mental and emotional health, social functioning, and vitality. The physical component scale is a weighted combination of variables capturing bodily pain, physical functioning, and the presence of physical health problems. Both scales range from 0 to 100 and are standardized to have a mean of 50 and a standard deviation of 10. Higher values correspond to better physical/mental health.

These findings support the “active jobs” hypothesis, which suggests that the combination of high job demands (work intensity, time stress, high workloads, conflicting demands) and high decision control (control and authority over work and possibility for growth and skill development) leads to favorable health outcomes. Thus, entrepreneurs, who are the embodiment of individuals working in active jobs, experience relatively high levels of health.

This research has two key policy-relevant findings. First, the fact that necessity entrepreneurship improves mental health—and does so independently of income changes—entails that active labor market policies, such as start-up subsidies for the unemployed, can not only promote labor market re-integration but also improve mental health.

Second, switching out of full-time private sector jobs into self-employment also brings health gains, at least in the short run. The self-employed have more flexibility to arrange their working days, which may better position them to engage in health-enhancing behaviors such as going to the gym.

Given that the mental health benefits of entrepreneurship exceed the physical ones, the positive consequences of self-employment appear to work through psychological mechanisms, which is a finding that deserves further exploration. While self-employment is not a silver bullet, these results show that in the short run, it can enhance social welfare by not only contributing to growth and innovation, but also to health.