Does Self-Employment Pay? The Role of Unemployment and Earnings Risk

Joaquin Garcia-Cabo and Rocio Madera

No 11136, CESifo Working Paper Series from CESifo

Abstract: This paper documents the role of unemployment and earnings risk in reconciling evidence in payoff differentials between self-employment and paid-employment. Using Spanish administrative data, we characterize the distribution and dynamics of earnings and document lower and less dispersed earnings in self-employment. We consider alternative hypotheses and highlight the role of lower unemployment risk in self-employment. We decompose earnings risk dynamics by estimating a life-cycle earnings process. Indeed, the self-employed experience lower returns but also face lower volatility and persistence of shocks throughout their life-cycle. Our results challenge the conventional view that self-employment necessarily entails higher risk and highlight that accounting for differences in labor earnings risk is important to reconcile the payoff differentials between self-employment and paid-employment.

Keywords: self-employment; segmented labor markets; earnings risk; income process (search for similar items in EconPapers)
JEL-codes: J24 J31 J41 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-ent, nep-iue, nep-lma and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_11136

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