Financial Capital, Human Capital, and Self-Employment in the UK

Why become self-employed and what are the key factors causing the utility from selfemployment to exceed that from paid employment? Mark Taylor (1996) has shown that higher expected earnings in self-employment relative to paid employment are a major attraction. The independence and freedom offered by self-employment are clearly appealing. However, those who desire job security prefer paid employment. Ajayi-Obe and Parker (2005) mentioned that “the self-employed enjoy a non-pecuniary benefit from work itself (e.g., independence) that makes a given amount of work in that occupation relatively less unattractive than the same amount of work would be in paid employment”. Schmitz (1989) presents a model in which endogenous entrepreneurial activity is the key determinant of economic growth. The theory also differs from standard model in that growth is driven by the imitative activities of entrepreneurs.

Evans & Leighton (1989) found liquidity constraints play a role when setting up a firm, as the availability of capital is a significant barrier to self-employment. However, the human capital model indicates that the more educated and skilled self-employed are likely to find it easier to raise external finance for their business. Therefore, Cressy (1996) has argued human capital and not finance is the main constraint on self-employment. This project will test whether financial capital and/or human capital is the main constrain of self-employment
in the UK.