Thursday, July 14, 2016

Research: Want More Entrepreneurs? Make College Cheaper

Research: Want More Entrepreneurs? Make College Cheaper

July 07, 2016


When college tuition rises, fewer people take the plunge into entrepreneurship, according to a new working paper by Harvard Business School economist Gareth Olds.
The paper isn’t studying Millennials and how student debt affects their career choices. Instead, it’s focused on their parents.
Olds found that in the U.S., a 10% increase in the average price of in-state college tuition corresponds with a 13.9% decrease in the number of parents with college-age children who become self-employed. The effect is strongest for parents with multiple children and holds up even after controlling for factors such as state economic conditions.
The theme of Olds’s research is twofold: Financial security makes it easier for people to start businesses, and government programs can help provide that security. His previous papers have documented how food stamps and children’s health insurance each promote entrepreneurship. Other researchers have found similar results for unemployment insurance and for government-provided health insurance for retirees.
Just like would-be entrepreneurs hesitate to leave their jobs for fear of not being able to afford health insurance, it makes sense that looming tuition bills might depress a parent’s appetite for career risk. Is starting a business really worth jeopardizing your child’s education?
Olds’s paper has important policy implications. Not only would cheaper tuition potentially mean that more students would have access to education — itself likely to increase entrepreneurship and innovation — but also it would free more parents to take risks by launching new companies. That’s arguably something the U.S. needs, since new business creation has been in decline over the past few decades. Olds suggests that “the rising cost of higher education may be partially responsible for the decline in new business starts in the U.S.”
He is not the first to make the connection. Last year the Urban Institute, a think tank, published a discussion paper exploring the link between student debt and entrepreneurship, though it noted that establishing a causal link between the two would be difficult. Olds’s paper, focused on tuition rather than debt, may be the best evidence to date that such a relationship exists.
Another paper, published last year by researchers at Penn State and the Federal Reserve Bank of Philadelphia, found a negative correlation between student debt and the number of new businesses in the U.S. But that negative relationship held only for companies with fewer than four employees. The researchers found no statistically significant link between student debt and the creation of larger firms, which the authors “interpret to mean that these firms had greater access to outside capital.” In other words, student debt was a deterrent for entrepreneurs who couldn’t find investors to back them.
That distinction matters. New small businesses may be an important source of economic mobility, but fast-growing, innovative new firms are what have the largest impact on the overall economy. And there’s less evidence of a shortage of growth startups.
Olds measured entrepreneurship by looking at parents who became self-employed (and by using their income from self-employment), not by measuring the headcount or revenues of their businesses. So his research can’t rule out the possibility that tuition levels matter most for smaller businesses, even for one-person operations in which a parent is essentially using self-employment as a bridge between full-time work and retirement. If that’s the case, it might lower the stakes in terms of the drag that high tuition places on the overall economy.
Further research should explore the relationship between tuition and growth startups. Nevertheless, previous work by Olds and others has documented the link between financial security and entrepreneurship not just for smaller firms but also for faster growth startups.
As a rule, people are willing to take entrepreneurial risk when they have some modicum of financial security. Parents a year or two away from owing tens of thousands of dollars in tuition bills aren’t likely to feel that they have much of it.

Walter Frick is a senior associate editor at Harvard Business Review.

This article is about EDUCATION
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