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Unraveling the relationship between the business cycle and the own-account worker's decision to hire employees

André van Stel (), Jose Maria Millan (), Concepción Román and Ana Millán

No H201302, Scales Research Reports from EIM Business and Policy Research

Abstract: 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 find 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 and other results from the paper suggest that formal education and former work experience are important assets for own-account workers which increase the probability that they create new jobs.

Pages: 23 pages
Date: 2014-04-17
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