Academic journal article Contemporary Economic Policy

Modeling the Incidence of Self-Employment: Individual and Employment Type Heterogeneity

Academic journal article Contemporary Economic Policy

Modeling the Incidence of Self-Employment: Individual and Employment Type Heterogeneity

Article excerpt

I. INTRODUCTION AND BACKGROUND

Over the last three decades, there has been considerable interest among both academics and policymakers in the determinants of self-employment, as well as business ownership more generally. Such interest is not surprising given that the self-employed have emerged as an important group within the labor force in many countries (Le 1999). Furthermore, self-employment and entrepreneurship have been regarded as avenues for raising employment with self-employees and entrepreneurs creating their own jobs and potentially creating jobs for others, thereby serving to alleviate unemployment and poverty.

A number of approaches have been developed to explore the determinants of self-employment, emphasizing to varying degrees sociological, psychological, and economic influences. Recent literature has explored the choice between self-employment and paid employment (see Earle and Sakova 2000), whereby individuals compare the utility derived from each sector and then decide which sector to enter. The existing literature has focused on the role of pull and push factors, where the former relates to factors which encourage individuals to voluntarily choose self-employment (such as independence and flexibility), whereas the latter relates to a lack of alternatives because of, for example, labor market conditions. For example, unemployment push and pull factors play an important role with displaced workers being pushed, or pulled, into self-employment by supply-side considerations (Taylor 1996). There has been a focus on the attributes of the self-employed, concentrating on characteristics such as gender, ethnicity, education, marital status, age, and number of children as well as financial factors such as wealth and unearned income. In general, empirical studies specify a reduced form Probit or Logit model of self-employment whereby the vector of explanatory variables contains a combination of individual and labor market characteristics. For comprehensive reviews of the existing empirical literature on self-employment, see Is (1999) and Parker (2004).

Modeling the incidence of self-employment, however, has proved problematic. Although the individual supply-side characteristics of the self-employed are well documented, we argue that to date the literature has largely neglected, or indeed misspecified, demand-side aspects that are potentially important in determining self-employment. In this article, we present results from a flexible econometric framework that allows us to model, separately and simultaneously, individual heterogeneity (i.e., supply-side influences) and employment type heterogeneity (i.e., demand-side influences) that potentially determine the type of individual who is self-employed. Demand-side influences, which characterize the heterogeneity of employment types, may curb the extent to which individuals are free to choose their preferred type of employment. This estimation strategy allows us to distinguish between the differential effects of factors which lead to individual heterogeneity and those which lead to employment-type heterogeneity. Thus, we are able to determine the impact of supply-side factors on the probability of an individual being self-employed while also controlling for demand-side influences.

Our focus on both supply-side and demand-side influences makes an interesting contribution to the existing literature, which has tended to focus on supply-side considerations. Such an approach is potentially particularly problematic in the context of policy directed toward encouraging self-employment. As argued by Parker (2004), it is important to explore both the supply of, and the demand for, self-employees in order to identify and attain the socially optimal level of self-employment rather than simply assuming that an increase in self-employment is desirable. Moreover, for policymakers it is important to know to what extent demand-side influences do indeed curb an individual's preferred employment choice: if this is particularly strong for some employment choices this will effectively hinder policy aimed at, for example, increasing self-employment levels. …

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