The choice to become self-employed and the decision to hire employees

Abstract

My thesis consists of three chapters. In the rst chapter, The choice to become self-employed: acknowledging frictions, I develop and calibrate a search model of self- employment that is quantitatively consistent with the unemployment, paid employment and self-employment rates, the transitions between those states and the observed dis- tribution of earnings in self-employment and paid employment. I first report evidence indicating that many individuals choose self-employment as a route out of unemployment. Using data from the European Community Household Panel (ECHP; Eurostat), I find that the proportion of unemployed entering self-employment is higher that the proportion of paid employed entering self-employment. Then I find that the earnings of the self- employed coming from unemployment are lower than the earnings of the paid employed coming from unemployment. Moreover, I find that the self-employed coming from unemployment earn less than those coming from paid employment. This evidence cannot be captured by existing theoretical models of self-employment that assume a perfectly competitive environment in the labor market and ignore market frictions such as unemployment. I construct a model of self-employment where I allow for on-the-job search in both paid employment and self-employment. Workers receive job offers from a wage distribution and business ideas from an income distribution. The model captures the fact that the self-employed earn less in median and in mean than the paid employed and that the distribution of self-employment earnings exhibits greater variation. Unemployed individuals choose self-employment with associated low incomes because their option values in self-employment are better than those in unemployment. Self-employment is a transitory state for these workers who see in self-employment a door to paid employment. The model is then used to analyze the e¤ects of some policies that encourage self-employment. In the second chapter, How does employment protection legislation in uence hiring and ring decisions by the smallest firms? (joint with J.M. Millán, C. Román and A. van Stel), we examine the impact of employment protection legislation (EPL) on hiring decisions by own-account workers and ring decisions by very small rms (1-4 employees). Using data from the EU-15 countries, our results show that the strictness of employment protection legislation is negatively related to both these types of decisions, and hence, to labor mobility among the smallest firms. This new evidence may be useful for governments aiming to create a more enabling macro-environment for employment and productivity growth. Finally, in the third chapter Unraveling the relationship between the business cycle and the own-account worker s decision to hire employees (joint with J.M. Millán, C. Román and A. van Stel), We study the role of the business cycle in the individual decision of own-account workers to hire employees. Using panel data from the European Community Household Panel for the EU-15 countries, we show that own-account workers are less likely to hire employees during recessions. Next, we focus on identifying the underlying mechanisms of this negative relationship, while bearing in mind that liquidity constraints and unemployment are more common during recessions. First, we observe how liquidity constraints reduce the probability of transitioning from own-account worker to employer. Second, we nd that non-higher educated own-account workers who were formerly unemployed are less likely to take on employees compared to those who were formerly in paid employment. This lower likelihood does however not seem to apply to formerly unemployed own-account workers who enjoyed tertiary education. These results suggest that formal education and former work experience are important assets for own-account workers which increase the probability that they create new jobs. This new evidence may be useful for governments aiming to stimulate employment growth.