The Self-Employment Option: an empirical investigation in rigid labor markets

Joaquin Garcia-Cabo and Rocio Madera
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Joaquin Garcia-Cabo: Federal Reserve Board

No 1311, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: This paper analyzes the determinants of becoming self-employed in labor markets characterized by high unemployment and reduced worker turnover, often referred to as rigid labor markets. We use a large panel of workers' histories for the last three decades from Spanish Social Security records to characterize the dynamics of the transitions into self-employment, as well as the heterogeneity of the newly self-employed. The Spanish case is of particular interest given the high unemployment levels and its two-tier structure, which features many of the current challenges brought up by the gig economy in many other countries. We document the age, cohort, and time dynamics of transitions into self-employment by different statuses of origin. We show that, in contrast to current evidence, the decision to become self-employed is pro-cyclical, regardless of the original job status. The age dynamics, however, are very different if coming from unemployment or paid-employment. We then exploit the rich data and the specifics of job regulations in Spain to understand heterogeneity across sectors and labor market attachment histories. Regarding earnings, workers who spent a predominant share of their careers before age 40 in self-employment, when going back to paid-employment earn less than fixed-term workers. We also find evidence of negative selection into self-employment, regarding business duration, when entering from unemployment as opposed to a salaried job. We discuss how these facts call for a revision of self-employment promotion policies in place.

Date: 2019
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