Self-Employment and Labor Market Policies

Alok Kumar () and Herbert Schuetze

No 704, Department Discussion Papers from Department of Economics, University of Victoria

Abstract: We develop a model of self-employment in the search and matching frame-work of Mortensen and Pissarides. We integrate two strands of theoretical literature: models of self-employment and models of unemployment. Our model explains many empirical findings which are not explained by the existing models of self-employment. In our model, higher minimum wage and unemployment benefits have negative effect on self-employment. These results are supported by empirical evidence. In addition, in our model self-employed earn less, on average, than wage employed workers in equilibrium due to frictions in the labor market. Thus our model provides a novel explanation to one of the key puzzles identified in the empirical literature. We also find that a higher business tax and a lower wage tax reduce self-employment.

Keywords: Self-employment; occupational choice; unemployment; search and matching; wage tax; business tax; minimum wage; unemployment benefits; job-creation (search for similar items in EconPapers)
JEL-codes: J23 J58 J64 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2007-10-05
New Economics Papers: this item is included in nep-bec, nep-dge and nep-lab
Note: ISSN 1914-2838
References: Add references at CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:vic:vicddp:0704

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