Alison Preston

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.