Wage penalties force mothers to start businesses

Entrepreneurship is a male-dominated field, with strong underrepresentation of women in new-venture founding and self-employment. However, it is more common for mothers than fathers to be entrepreneurs. This is examined in more detail in an article in the respected research journal Organization Science by, among others, Lucia Naldi, professor of business administration at Jönköping International Business School, Jönköping University.

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The fact that entrepreneurship is a male-dominated field is confirmed by the underrepresentation of women in both new businesses and self-employment. Only 21 per cent of new-venture founders and 36 per cent of self-employed people in Sweden are women. Almost twice as many men as women go from wage employment to self-employment every year.

However, motherhood is much more associated with new-venture and self-employment than fatherhood. Approximately 82 per cent of female founders are mothers and 71 per cent of the self-employed. Among the men, 77 per cent of founders and 61 per cent of the self-employed are fathers. Results on individuals’ yearly rate of entry into new-venture founding or self-employment show the same pattern.

An explanation for this could be the so-called motherhood wage penalty. It can be described as the negative effect on wages and wage growth for mothers. For fathers, on the other hand, it is the other way around – here you can even talk about a fatherhood wage premium. However, the "premium" for fathers is low, around two per cent - while the "penalty" for mothers is between six and eight per cent. These earnings differences are net of education, years of labor market experience, organizational tenure, occupations, and work hours.

“When we examined income differences by sectors, we saw, not surprisingly, that there was a much larger motherhood wage penalty and fatherhood wage premium in the private sector than in the public sector. As well as in smaller firms than in larger firms,” says Lucia Naldi.

More companies will be started by well-paid mothers

The researchers believe, by combining insights from career mobility research and the motherhood wage penalty literature, that women who become mothers will continue to launch new business to a greater extent to reduce the "penalty" they would otherwise incur in wage employment due to employer discrimination.

“We further predict that the tendency to launch new businesses will be greater for women who occupy high-wage or managerial positions, given the higher opportunity cost of remaining in wage employment and the higher potential payoffs from entrepreneurship that mothers get in such positions,” says Lucia Naldi.

The research is based on data on all employees in Sweden in the age range 20 to 50 years from 1990 to 2018. However, individuals who were parents already in 1990 have been excluded.

The article is written by Lucia Naldi together with Aleksandra Kacperczyk, Professor of Strategy and Entrepreneurship at the London Business School, and Tiantian Yang, Assistant Professor in Management at the Wharton School, University of Pennsylvania.