Millions of Americans aspire to own their businesses, and in recent years, an increasing number have succeeded. In the year 2021 alone, approximately 5.4 million new companies were registered in the United States, a 23% increase over the previous year. While the pandemic was a major catalyst for much of this entrepreneurship, new research suggests that education is also playing a significant role.
According to a new study by Iowa State University economics professor John Winters and graduate student Kunwon Ahn, more years of education lead to higher rates of entrepreneurship and self-employment. According to the findings of the study, “An additional year of schooling increases self-employment in high-growth industries by 1.12 percentage points for women and 0.88 percentage points for men.” To summarize, “the findings suggest that formal education improves entrepreneurship” according to the paper.
As a result, according to this study, if you want to be a business owner someday, your best bet may be to stay in school. The study examined employment and educational data for over 8 million people born between 1963 and 1990, spanning generations from younger baby boomers to millennials.
Surprisingly, the paper comes on the heels of another report that found that community colleges, on average, produce graduates who are not job-ready, according to many employers. While this may cause some prospective students to reconsider higher education, the findings of the Iowa State study suggest that if your goal is to build your own business rather than just find a job, going to school may be a viable option.
More education, however, resulted in different, albeit similar, outcomes for men and women. It resulted in more self-employed men entering various industries, as well as more overall female entrepreneurs.
“The benefits of education are frequently debated,” Winters said in a statement. “Some are concerned that it is more about signaling than skill development, but our research shows that additional years of education after high school can boost self-employment in high-growth industries.”
“Education empowers,” he adds. “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. Education may have an even greater impact on encouraging women to pursue entrepreneurship by increasing their confidence as well as their skills.
The risk of failure, particularly as we enter a period of economic uncertainty, may deter many would-be entrepreneurs for the time being. However, the Iowa State study demonstrates the importance of education in motivating prospective business owners to take action.
“Education and entrepreneurship are both hugely important topics, and understanding how they interact is critical for a prosperous future,” Winters said.
Despite the apparent shortcomings of some community colleges and two-year degree programs, the Iowa State report may provide policy ammunition for governments, which have long 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.
Furthermore, the majority of job growth in the United States is already being driven by thriving small businesses and business formation. In fact, small businesses have created two out of every three new jobs in the United States over the last 25 years.
Making the transition from employee to entrepreneur is not without risk—according to government data, approximately 20% of new businesses fail within one year, and half fail within five years.