Planning for Which Future? Searching for Jobs While Running a Business: Guest post by Adrien Dautheville

This is the 13^th in this year’s series of posts by PhD students on the job market

Historically, economic development has been characterized by the gradual transition of micro-entrepreneurs into salaried employment as economic growth spurs the rise of larger, more productive firms. This transition from small-scale, informal activity to modern labor markets is not happening in Africa, where small and micro businesses represent over 90% of the labor force. Despite dramatic growth in education, the firm structure remains dominated by micro-entrepreneurship and fragile self-employment. In fact, young workers today are only just as likely as their parents’ generation to hold salaried employment.

The policy response has involved substantial and wide-ranging investments. Governments, donors, and NGOs have committed significant resources over decades, implementing a broad suite of programs to support micro-entrepreneurs, including microcredit schemes, business training initiatives, and technology upgrading.  Yet, as the literature has persistently documented, results of these programs are often small or null. Surprisingly, many micro-entrepreneurs choose not to take advantage of profitable opportunities offered to them.

In my job market paper, I propose a novel hypothesis to rationalise the low take-up of profitable business opportunities: what if micro-entrepreneurs are not only maximizing business profit, as economic models usually assume, but simultaneously trying to secure highly valued salaried positions? In a context of constrained resources, this dual objective introduces a stark trade-off:  every hour spent on job search is one less hour invested in business. Every dollar spent on applications is money not invested in inventory.  Facing this trade-off, job-seeking entrepreneurs must weigh the returns to job search against business investment, with beliefs about the likelihood and timing of employment transitions as key determinants of this choice.

Model and mechanisms: How biased beliefs shape resource allocation

To formalize this behavior, I develop a dynamic model that augments standard job search theory with entrepreneurial investment. My model identifies two channels through which job market misperception can drive resource misallocation:

1. Overconfidence about job search effectiveness. Job search effectiveness is measured as the likelihood to secure a salaried job for 5, 10 and 15 hours of weekly job search. If entrepreneurs believe search is more productive than it truly is, they over-invest in job search and under-invest in their business.
2. Overoptimism about employment likelihood. Employment likelihood is measured as the expected raw transition rate to salaried employment, implicitly taking into account expected job search effectiveness, expected search effort level, reservation wage, rate and distribution of wage offers. If entrepreneurs overestimate their chances of soon transitioning to salaried employment, their incentive to invest in business is reduced.

Both channels ultimately lead to underinvestment in business, consistent with the persistent stagnation observed in the continent.

A new lens: When job search crowds out business investment

Empirically, this trade-off is both widespread and consequential. Surveying 900 micro-entrepreneurs in Dar es Salaam, Tanzania, I find that 65% are actively seeking salaried employment while running their businesses. The sample of market traders, operating on 15 established markets across Dar es Salaam, are selected to be less than 30 years old, and to have fewer than 5 employees (most have 1 or none). While 9% of them have other income geniting activities (such as casual work, additional business, or farming), the market business remains their main occupation. I conducted two surveys, the first in person and the second over the phone 5 months later. The follow-up survey had 10% attrition, but no difference on observable baseline characteristics.

 Consistent with my model, job search is negatively correlated with business investment and performance. Compared to those not searching for jobs, active job seekers:

• Work 4 fewer hours per week in their businesses, from an average of 49 hours among non job seekers.
• Hold 29% less inventory, from an average of 636,000 TZS (714 US$ PPP) among non job seekers.
• Realize profits that are 16% lower, from an average of 268,000 TZS (301 US$ PPP) among non job seekers.

This negative correlation is robust to controlling for unbalanced variables by search status. It also goes beyond selection on observable characteristics: education, business age, and risk or time preferences are similar across job seekers and non-job seekers.

The direct costs of job search (travel cost, printing, phone or internet time…) are substantial: on average, each application absorbs 13% of monthly business profits—a figure in line with comparable studies on job search costs. The (perceived) opportunity cost is even greater: job seekers estimate that time spent searching (average of 10 hours weekly), if reallocated, could boost business profits by 30%.

The role of job market misperceptions

Because information about the labor market is scarce, the role of beliefs is central. Entrepreneurs in the sample systematically overestimate their odds of moving into salaried work: 48% believe they will have a salaried job within a year. The actual transition rate, measured five months after the follow-up survey, is just 1–2%, matching the exceptionally low transition rates reported for the region in the existing literature. By symmetry, entrepreneurs also underestimate the longevity of their business. They predict the likelihood that they will still operate their own business in a year to be at 70%, while in reality the rate is 95% after 5 months.

These patterns mirror salaried job market misperceptions previously documented among job seekers and students. However, their appearance among micro-entrepreneurs is especially notable for two reasons. First, these are individuals who have already sorted into entrepreneurship, suggesting that strong labor market misperceptions persist well beyond the entry stage. Second, given that the majority of Africa’s workforce is engaged in micro-businesses, belief-driven misallocation of effort has economy-wide significance. Unlike standard job seekers, micro-entrepreneurs face a unique resource allocation problem: their optimism does not just affect their own job search but may also translates directly into reduced business investment and growth at scale.

Simple information about the transition rate has only limited impact

A natural solution for biased beliefs is information provision. I randomized the provision of information about the actual transition rate from entrepreneurship to salaried employment (1% annually) to half the sample. The information provision was implemented as a scripted statement displayed on the survey tablet about halfway through the baseline interview. The survey was run by my research partners from a well-respected Tanzanian organization, in their official office setting. Both the organization’s reputation and additional qualitative interviews indicated that respondents regarded the information as serious and trustworthy. While experimenter demand effects are possible, concerns are minimized as only the measure transition rates closely mirrors the language of the treatment. The perceived return of job search and hypothetical job uptake questions are more distantly related, and revealed behavior in the subsequent months is unlikely to be driven by experimenter demand.

Immediately after the treatment, treated entrepreneurs lowered their expected returns to search and set lower reservation wages. Effects faded away after five months, with no sustained changes in beliefs, job search activity, or business investment. The immediate effects on expectations are stronger for the sub-sample of (self-reported) active job seekers, but the effects five months later job search and business investments are not significantly different from zero.

The figure below plots the main coefficients estimated for the treatment effects, in standard errors terms. The first four outcomes are measured immediately after the treatment, the next four outcomes are measured five months after the treatment

Policy Implications: Rethinking Support for Micro-Businesses and Job Seekers

These findings have implications for several long-standing policy debates:

1. Labor market policies must recognize that entrepreneurship and job search are not mutually exclusive but deeply intertwined for many young Africans. Support programs need to address the opportunity costs and constraints across both margins, rather than treating entrepreneurs and job seekers as separate populations.
2. The persistent underperformance of technology adoption, business training, and credit interventions may partly reflect the divided focus and incentives of entrepreneurs who are also job seekers. Improving access to capital or training alone is unlikely to deliver growth where underlying aspirations are not focused on business, and labor market over-optimism is prevalent.
3. Information interventions may have limited long-term impact. Simple corrections of statistical misperceptions offer only temporary changes in beliefs. Addressing persistent overoptimism likely requires deeper engagement, perhaps through ongoing career guidance, structured feedback, and programs that address the underlying scarcity of valued jobs.

Understanding how micro-entrepreneurs balance (and sometimes misallocate) their resources between running a business and searching for salaried work is essential for designing development programs aiming to promote firm growth and job creation.

Adrien Dautheville is a PhD student at the Norwegian School of Economics.