Shooting Stars? Prior wage and the returns to Entrepreneurship

This article advances a theory to explain why a spell of entrepreneurship affects the future wages of entrepreneurs returning to the wage sector. We propose that entrepreneurship holds a low rather than a negative information value, increasing the uncertainty around a job applicant's future productivity. Employers respond to this uncertainty by discounting the offered wage. The theory predicts that uncertainty in hiring—and thus the wage penalty—is more pronounced for entrepreneurs (a) who were in the upper tail of the wage distribution before the entrepreneurial spell, (b) who exited entrepreneurship quickly, and (c) who are hired by small employers. We test and find empirical support for these predictions using a novel dataset of matched entrepreneurs and employees from Belgium.