Explanation of business creation process and entrepreneurship

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Theoretical framework

The theoretical framework in this paper covers education which is one of the main com-ponents of the human capital and its effect on the income distribution. The income dis-tribution and economic performance has become a key area of research in economics. The framework includes an extension of the correlation between the education and the income distribution across the EU. Considering the theoretical predictions about this re-lationship, the paper will look for empirical evidence based on cross-country data set.
The spread of the income distribution is determined by the level and distribution of schooling, it can be reduced with higher education levels across the whole population. Economic growth increases with higher education level, which in turn decreases the gap of income (Schultz 1963).

Income Level

The income in this paper includes the sum of all taxable and tax free income minus tax-es and negative transferals. The affection of various variables on income distribution are discussed by multiple authors. There exist many theories on how income is affected, with regards to social, heritage, regional and cultural backgrounds. Income levels are of-ten determined by previous generations due to receival of heredity and contacts in the fields of work (Checchi 2000). Social status and economic wealth is descended from a generation to another. According to Cooper (1998), poor and wealthy families are stabi-lized within their social statue and level of income, as they are trapped at these levels for at least a generation. Families belonging to the average income earners are more af-fected by the fluctuations of the market, as some may earn more or less and belong eventually to another income community, depending on their achievements, in less than a generation. This is acknowledged in the paper, hence the significance of education on income distribution is the essence of it. Education is considered the main source for en-hanced productivity and “skills deepening” (Williamson 1991).
The average income level differs between the European Union members, shown in Fig-ure 2.1. Luxembourg has a much higher average income (31800) than Romania (around 2000 Euros). It is evident that the countries in Eastern Europe are at the bottom of the scale regarding income average, shown in Figure 2.1, mainly due to new inclusion with-in the EU. The average income of the rich in these member states may equal the average income of average earners in France, Germany, Great Britain etc. (Eurostat 2011).
The paper differs in the essence of explaining the role of education, with regards to Schultz model (1963), indicating that increased education level narrows income distri-bution. The “wage effect” by Knight and Sabot (1983) is crucial to understand why education changes the spread of income.

Income distribution

Income distribution indicates the allocation of earnings, from investments, salaries, sales etc. The income distribution is often misunderstood since there are different pers-pectives regarding it. From a humanitarian point of view, an unequal distribution may be suppressive within societies, since it causes social clashes. From an economical perspective, income distribution could affect different factors of growth positively, such as human capital, savings, investments etc. Income inequality is acknowledged as a re-warding mechanism, where the best fitted are allocated the toppaid jobs and suitable roles within society. It adds a supplementary motivation for the lessfortuned to reach another “social class” (Ray 1998 p.169-170).
Figure 3.1 shows the difference in income distribution between the richest 20% and the poorest 20% in 2009 with focus on the European Union member states. From the figure 3.1, one can acknowledge the income gap between the rich and poor within the EU countries. The richest 20 % in Latvia are more than 7 times richer than the poorest 20 %. Romania’s top class has 6.7 times more income than the bottom. The richest in Luxembourg, France, Germany, Cyprus have approximately 5 times more than the poor. The social-democratic regimes are more equal and enjoy around 3-4 times richer than the poorest 20 %. Sweden, Denmark and Finland may be more even due to free educa-tion system, free health care and other social benefits that increases the equality between the citizens, such as unemployment benefits for the lower average income quartile. Lat-via, Romania and other with high inequality between the rich and poor can be explained by the lack of social benefits such as free education system at the higher levels, e.g. uni-versity level.
The unequal income has a negative effect on the civil society (Krueger 2002). This is an important factor explaining the exclusion of some with regards to education. The coun-tries with higher inequality have higher rates of homicides and other criminalities, along with lower life expectancy for the economic bottom. Countries with high GDP do not reflect the wellbeing of the mass, rather the high income received by the top shift. Por-tugal has the highest index of health and social problems, and also the highest stretch between the top 20% and the bottom 20% economically. UK has the second spot, fol-lowed by Greece, Italy, Ireland, France etc.
The health factor has an impact on income distribution as the healthier are more ade-quate for work (Wilkinson 2011). Also, the costs of medical care are also important to account for since high percentage of the income are flown into it. High income inequali-ty usually tends to hold back growth in poorer countries or developing ones, while boosting growth in the developed economies. This is due to social cohesion in the less fortuned societies, where the poor citizens do not have the potential of climbing up the economic ladder due to suppression or imprisonment. Some are required to actively par-ticipate in crimes to support their families etc. Higher unemployment rate is also an in-triguer of social injustice and increased inequality (Wilkinson 2009, Sen 1997). In de-veloped economies, as social-democratic regimes as in Sweden, these factors are not necessary since social benefits are promised and education may be free. In other words, where opportunities arise for people to invest in themselves and in education to receive a better future, any individual will make the best of it. On the other hand, if the opportunity is lacking, the people will remain suppressed and other ways to survive will be prioritized and the risks would be taken (Schultz 1981, Barro 1999).

Education

Human capital has been distinguished recently from the factor of labor, since it indicates the knowledge possessed by the labor force. It is acknowledged as the level of attributes, knowledge and competence such as intelligence of the labor force to enhance economic values, by increasing the level of production. The knowledge is a direct effect of education or experience within the working field. In some member states within the EU, there exist a labor-surplus market. This indicates that the amount of available hu-man capital exceeds the capital resources, referring to high unemployment level. Devel-oping the educational and health sectors could exploit this, since they require more hu-man capital than capital resources. Increased education improves the social structure, along with the level of knowledge within a population. It improves human development and the standards of production, by increasing the quality and quantity produced (Mah-bub 1996).
Education is the key component of human capital and the main source of general human capital, opposing job-specific human capital that includes experience and other compo-nents. The basic findings in Schultz’ work is that education investments lead to direct increase in human capital, hence an increase in productivity and economic growth. Ac-cording to Schultz (1981), experience is left out due to its difficulty in estimating the right parameters and data. Education contributes to easier accessibility to information, improvements in sanitation and health, investments in future generations and increased equality. It reduces poverty since more education offers better jobs, without accounting for racial, gender or social discrimination. It also increases the social statue of individu-als and their families. Sufficient level of education enhances entrepreneurial talent and specialization required in the field of labor. Yet be aware that education itself is not suf-ficient and the benefits of it do not appear immediately as self-motivation, experience, personality and other factors are taken into account. Often, changes are only seen in the generations to come, as more income is available for consumption and investments. The price effects of education play a major role in the distribution of education, as the lack of affordability is often the reason of being left out from the educational system (Schultz 1975).
Checchi (2000) explains education as the main source of upgrade within economical communities. By lowering tuition fees and offering financial benefits for students, the incentive to study increases, leading to lower income inequality. Quality of education is also an important factor for improved competitiveness. Education offers increased spe-cialization, preferences and choices within the preferred workfield. The possibility to work within the field of interest enhances productivity (Heshmati 2004).
Factors affecting the level of education negatively include:
• Level of illiteracy due to work at early age or lack of affordability
• Unequal regional coverage, some regions are alienated due to high migration, high criminality or located in rural areas
• Low quality in the educational system
• Insufficient funding of educational institutions or other public institutions that offer economical help for the less fortuned
• Gender and racial inequalities
Arrow (1973) and Spence (1973) argue that the final degree received at university or upper secondary school matters more than the amount of years required for graduation. This is known as the sheepskin effect, higher income due to fulfilling your degree, and not for the time period. It remains unanswered whether time can justify the qualification of some, yet the efficient student may have an advantage over the less efficient in the labor market due to higher productivity in less time constraints (Weiss 1983). The as-sumption used in the model is that everyone with a degree is compatible for the same achievements, yet the ones who finished in shorter time are more skilled.
European standards on education, as the Bologna Process, compares the level of educa-tion applicable for different jobs. The agreement between the European states enhances the mobility of the labor force, competitiveness and appropriate matchmaking (Swedish Education ministry 2011). These comparisons do not properly take into account the quality of schooling or the type of education, rather the degree level on tertiary educa-tion and the title received within the field of interest. The degrees reflect the abilities, preferences and choices taken by the workers (Barro & Lee 2001).
Schultz defines education as a non-tradable life-long “stock” with no transportation costs. Education is costly and hence is acknowledged as an investment in you. This in-vestment should occur at early age to benefit from it for a longer period (Schultz 1981).
Figure 3.3 shows the tertiary education attainment across the EU member states. The level of education is accounted in percentage, indicating the amount of the population with completed tertiary education. Rep. of Ireland has the highest education level with over 30 % followed by Finland, Luxembourg and U.K. Italy, Malta, Greece, Portugal are at the bottom. This could be due to the large share of the population leaving school at early age to work in the service sector, which does not require higher education level.
The mobility of educated laborers, since the imposition of the European Union, has in-creased due to the possibility of receiving work permission easily between the member states. This has lead to an increase in the spread of income throughout the EU due to the willingness of educated citizens from the less developed countries to seek better futures for themselves and their families. The ability of education abroad, in a member state where the education level is higher and the fees are cheaper or for free along with a promising future, has the tendency to attract the less fortuned, yet willing student, to move to countries such as Sweden, Great Britain, and Germany etc.

The effect of education level on income distribution in EU

The spread of income distribution across the EU has increased the incitements to better education, as the main idea is that the better education you possess, the more likely you will receive better salary. The willingness to earn higher salaries and reach higher posi-tions within the market drives an individual to endure with the level of education. This is known as the wage effect. With a high level of the educated within a population, “wage compression” may occur due to increased supply of educated workers, hence de-creasing the salaries and benefits of high-educated workers (Knight & Sabot 1983). Ac-cording to the human capital theory, which emphasizes the role of schooling, the higher the education and experience of workers (the two major components of human capital), the higher the income received due to the assumed increased productivity. In order to invest more years in a higher education, it is critical to receive, once the working life starts, a compensation for the lost income throughout the years as a student. The satis-faction of possessing more knowledge after university does not cover for the lost in-come, hence the importance of a higher salary than for the non-educated (Mincer 1974).
In the case where the level of salaries are similar between the educated and non-educated, or experienced and non-experienced, the incitements to invest more years into an education program decreases, since there exist no guarantees of compensation and hence the people would rather work immediately after high school. This shows that an unequal income distribution has a positive effect on human capital, and an equal income distribution may affect it negatively (Graham et al. 2002).
Is the gap of the income distribution healthy to enact human capital or does it affect it negatively? To offer an example suitable for human capital’s effect on income distribu-tion, it is not required to look further than the educational system in Sweden, where tu-tors earn low salaries in comparison with jobs with no educational requirements. Teach-ers usually study for at least four years to receive a degree which will offer them ap-proximately 25 500 crowns per month (17 850 after taxes). Many may argue that this salary is high, which is the case in many countries, yet in Sweden, an average worker with no skills or education may receive approximately 24 000 crowns per month (16 800 after taxes)(Statistiska Centralbyrån 2010). With a four year education, indicating four years of debt and lost income, approximately 1 000 crowns extra disposable in-come per month as a compensation is not sufficient. This could increase the incitements for students to leave their educations and instead invest, at early age, in the working field where they may earn money and experience, which is also considered a part of human capital. As a conclusion, the comparison of different incomes, for educated and non-educated, may be the difference between a positive or negative shift in human capi-tal development. The assumption is that the increased level of education has direct ef-fect on the income distribution, as more experienced and educated workers’ productivity are enhanced, which is reflected in the wage differences.
Income distribution is affected by the transferals of technology and educated laborers from the less developed states towards the leading economies of the world, and in the topic’s case, the European Union. The non-educated citizens are disfavored by the sys-tem in contrary to the highly educated (Tamura 1991). Education has two distinct ef-fects on the economic performance on regional and national levels, the first is the prod-uctivity of each employee, due to the level of knowledge. The second is the ability to adjust to new technologies and fast-moving industries due to experience (Mincer 1958). Education is indispensible to modern labor markets due to the increased requirements at work. These requirements are direct effects of modernized technologies and specializa-tion needs. Multiple studies conclude the fact that the higher educated are compensated more, shown in their wage level, their prominent social status and the level of employ-ment of the educated (Cohn & Addison 1997). Higher educational attainment is reached by simplifying the access, through lowering tuition fees and public financing, also by raising the quality of tutors and books.
In the occurence of high human capital, which offers an incentive of increased unequal income distribution, part of the population may be excluded from the education system. This could be due to higher requirements to apply, or simply due to the lack of afforda-bility. It also depends on the national system of each member states, as Sweden has less spread in the income distribution due to the free educational system and higher taxes for high earners, while Great Britain has a higher spread due to the high fees for universities and lower taxes for high earners. Education is important in order to reduce the spread of different income levels in an economy in addition to its direct impact on labor produc-tivity (Schultz 1963, Becker 1964, Tilak 1989). Usually, the income distribution spread is higher in developing countries due to the large amount of poor citizens. Also, in de-veloping countries’ rural areas, where farms are still maintained by whole families, the opportunity cost to send a child to earlier stages in school could be costly, even though the education at that level is usually free (Todaro & Smith 2009 p.394-396).
Some theorists argue that inequality is suitable for increasing incentives for citizens to innovate and invest. They mention the increase of income inequality as a direct effect of increased wage differentials based on jobs requiring education, and vice versa. The ca-pitalistic influence by these authors is about rewarding the educated and influencing the less fortuned to invest in a stable education. The problem lays in the affordability, in which solutions are lacked (Goldin & Katz 2007). Public spending on education may offer access to everyone, yet the problem lays in affording materials and attending school. Also, the income gap may widen since raised taxes will be imposed to fund the public education. The necessity of affording education for low-income families is priori-tized, as citizens should strive to invest in their own human capital. Public policies should emphasize this assumption, by promoting free educational system and design policies suitable for the poor as it is healthy for economic growth. Tax cuts and other benefits could raise the incentives of low-income takers in prioritizing such invest-ments. Also, the banking system should be remodelled, as the less fortuned are neg-lected the possibility of receiving credits, leading to no education affordability (Sylwe-ster 2000).
Highly developed countries as Sweden, UK and Germany necessitate a higher educa-tional level for most of its citizens, since their economies prioritize technological manu-factures and banking systems that need specialized laborers. Workers at corporations are usually highly educated in order to understand the underlying process required to im-prove the efficiency of production. On the other hand, education is less required in ser-vice concentrated sectors, such as touristic countries. In southern Europe, the level of education is low, shown in Greece, Spain, Portugal, Italy etc. due to the availability of jobs that does not prioritize education as in restaurants, hotels, bars and other touristic sectors. Yet the income distribution is more severe in these countries, since the educated gain much more than the non-educated. Take into account that the average income does not account for the gratuity tips offered at the service sector, hence the low income level shown (Mingat & Tan 1996).
Schultz (1981) implies that the level of education determines the income distribution across the country. The income distribution of societies with higher education level is often less unequal to others, with emphasize on the word “often” and not always (Schultz 1981). According to Schultz, inequality in education widens the income distri-bution as the top earners enjoy bigger share of income and bottom earners will increase in proportion, yet their income share is smaller. On the other hand, increased level of education affects the two tails of the rich and poor, as the bottom earners will enjoy more disposable income, and the richer will have less due to decreased wage level as a direct cause of more competition (Schultz 1963).
The balance between “wage compression” and “wage composition” may explain the impact of education on income receival. “The composition effect” indicates that an in-crease in education level leads to higher income gap within the population due to im-proved productivity, hence the higher wage for the more effective employees. Yet with high education, “wage compression” may occur due to increased supply of educated workers, the premium of higher skills is less valued, hence decreasing the salaries and benefits of schooling. It also raises the salaries of the low-educated, which in turn nar-rows the income distribution. In other words, wage effect is determined by the supply and demand of laborers, hence the fluctuation of income distribution (Knight & Sabot 1983).
As a conclusion, income distribution is explained by the level of disposable income for the population of a state. Due to difficulties in measuring the whole population, the av-erage income of quintiles are taken into account and compared. Also, human capital’s main component is education since it develops and specializes laborers within their field of work. Schultz (1981) argues that the gap of income is narrowed by an increasing lev-el of education, since the poorer receive higher wages and the rich are victims of the “wage compression”. This assumption will be tested further in the empirical analysis section, with regards to the European Union.

Table of Contents
1 Introduction
1.1 Problem statement
1.2 Purpose
1.3 Frame of Reference
1.4 Method
1.5 Collection of data
2 Wine Essence Case Study
2.1 The French Wine Market
2.2 Bordeaux Wine Market
2.3 Presentation of Wine Essence
3 Literature Review
3.1 Explanation of business creation process and entrepreneurship
3.2 Recognizing opportunities and generating idea
3.3 Feasibility analysis
3.4 Industry, market and competitor analysis
3.5 Developing an effective business model
4. Analyses
4.1 Interpretation of the interviews
4.2 Difference with the literature
4.3 Main results of the analysis
5 Conclusion
6 Implications
List of references
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