Financial Literacy and Self-Employment

Abstract

This article uses individual-level data collected in the Household, Income and Labour Dynamics in Australia (HILDA) survey in 2016 to econometrically explore the direction of causation between financial literacy and self-employment. The empirical approach is based on applying instrumental variables (IV) analysis in a three-outcome labour supply model (i.e. self-employment, employee employment and non-employment) that controls for selection into employment. In keeping with a small number of studies, the analysis suggests that there is a positive relationship between financial literacy and self-employment. The analysis also suggests that the likely causal direction is from financial literacy to self-employment. However, this is also found for employee employment. Therefore, policies aimed at increasing financial literacy will likely not only increase self-employment but also employee employment. This suggests that financial literacy may be a form of “general human capital,” such as education, work experience or training. However, the impact of financial literacy on self-employment is not larger (more positive) for self-employment compared to employee employment. Clearly much more research is needed to understand the numerous relationships between financial literacy and other labour market outcomes.