also controlling for observed characteristics and unobserved individual effects. We want to know
whether business ownership induces upward mobility in the income hierarchy and whether business
ownership helps owners maintain a position at the high end of the income distribution.
The paper is organized as follows. Section 2 reviews earlier studies on the relationship
between occupation and income mobility. Section 3 presents the register data used in this study. We
also ask here whether the individual level data we have available for this study replicate household
level trends in income inequality before discussing initial evidence from mobility tables. In Section 4
we probe deeper into correlations between business ownership and placement in the income
distribution by estimating a random effects transition model. Section 5 closes the paper.
2. Discussions in the literature on the relationship between
involvement in small businesses and income mobility
When analyzing the relationship between income and business activities, it is important to note that
there is no obvious direction of causality; occupational choice and income will often be seen as
simultaneous variables. In the occupational choice literature, incomes or yields in different states, e.g.,
in wage employment or self-employment, are used as explanatory variables.
The main ambition of the present study is to assess the effect of involvement in business
activities on income development. In that respect the present study aligns itself with the literature on
entrepreneurship and self-employment as a means of upward mobility in the income hierarchy. This
means that the occupational choice variable crosses over to the explanatory variables. A number of
papers by Fairlie discuss business ownership and entrepreneurship as a route out of poverty and
unemployment for disadvantaged families. Two of them (Fairlie 2004; 2005), are based on estimations
of earnings regressions, and employ panel data and fixed effect identification strategies. Both show
some evidence of the claim that business ownership provides a route for economic advancement,
balanced against opportunities in the wage/salary sector.4 Similarly, Holtz-Eakin et al. (2000) note that
social climbing by dint of one’s own business acumen, as personified by the successful protagonists of
Horatio Alger’s rags-to-riches novels, has a powerful hold on American society. They estimate a
version of a Markov model by ordinary least squares, where the dependent variable is the percentile in
year t+1, explained by the percentile in year t and a number of other explanatory variables. In order to
allow for non-linearities in the relationship between present and past positions, a quadratic
specification is employed. They find that self-employment is beneficial for individuals starting out at
4 However, there are differences between male and female groups, as the latter do not benefit from self-employment as
business owners, according to Fairlie (2005).