By Sam Becker
Millions of Americans dream of owning their own businesses and, in recent years, more and more have brought that dream to fruition. During 2021 alone, roughly 5.4 million new companies were registered in the United States, an increase of 23% over the previous year. While the pandemic has clearly been a significant catalyst for much of this entrepreneurship, new research suggests that education is playing a big role, too.
Additional years of education lead to higher rates of entrepreneurship and self-employment, according to a new study from Iowa State University economics professor John Winters and graduate student Kunwon Ahn. The study, which was published in Small Business Economics, shows that “an additional year of schooling increases self-employment in high-growth industries by 1.12 percentage points for women and by 0.88 percentage points for men.” To sum it up, “the results suggest that formal education enhances entrepreneurship,” the paper says.
As such, if you want to become a business owner someday, your best bet may be to stay in school—at least according to this study. The research looked at employment and education data for more than 8 million people born between 1963 and 1990, meaning it spanned generations from younger baby boomers to millennials.
Interestingly enough, the paper comes hot on the heels of another report, which showed that community colleges are, by and large, producing graduates who are not work-ready, according to many employers. While that may have some would-be students second-guessing higher education, the takeaways from the Iowa State study suggest that if your goal is not merely to find a job but to build a business of your own, hitting the books may be a path forward.
But more education also led to different, albeit similar, outcomes for men and women. Specifically, it led to more self-employed men filtering into different industries, while it led to more overall female entrepreneurs.
“The benefits of education are often debated,” said Winters, in a statement. “Some worry it’s mostly about signaling rather than skill development, but our study provides a piece of evidence that additional years of education after high school can boost self-employment in high-growth industries.”
“Education is empowering,” he added. “[For men,] additional schooling may not affect their confidence much, but it can provide skills to help them in more productive and higher growth industries. For women, education may have an even greater impact on encouraging them to jump into entrepreneurship by increasing their confidence in addition to their skills.”
Despite the apparent shortcomings of some community colleges and two-year degree programs, the Iowa State report may provide some policy ammo for governments, which have, for decades, focused on increasing entrepreneurship and business formation rates as a way to stimulate economic growth and increase the number of jobs in a given area.
Further, most job growth in the United States already does stem from burgeoning small businesses and business formation. In fact, two out of every three jobs added to the U.S. economy over the past 25 years are attributed to small businesses. As such, there are reasons to want to inspire more people to become entrepreneurs.
Of course, making the leap from employee to entrepreneur isn’t without risk—around 20% of new businesses fail within one year, and half fail within five years, according to government data.
The risk of failure, especially as we head into an economically shaky stretch, may be enough to turn many would-be entrepreneurs off for the time being. But the Iowa State study does show how critical education can be in spurring prospective business owners to action.
“Education and entrepreneurship are both massively important topics, and better understanding how they work together is critical for a prosperous future,” said Winters.
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