Estimating labor supply in self-employment: Pitfalls and resolutions

Daniel S. J. Lechmann

No 101, Discussion Papers from Friedrich-Alexander University Erlangen-Nuremberg, Chair of Labour and Regional Economics

Abstract: The small extant literature on the working hours of self-employed workers is deficient, because it often lacks a clear theoretical underpinning and suffers from three common mistakes: including the hourly wage as an explanatory variable, controlling for input factors of production, and not considering endogenous selection of self-employed workers. I introduce a structural causal model that makes clear that neither the wage nor input factors such as the number of employees or the amount of capital invested are determinants of working hours in self-employment. It also shows why selection bias arises when using a sample of self-employed individuals. I present an empirical discrete choice labor supply model that resolves these issues. Estimating this model with German data, I find that both non-labor income and education negatively affect labor supply in self-employment.

Keywords: Germany; labor supply; self-employment; SOEP; structural causal model; working hours (search for similar items in EconPapers)
JEL-codes: J22 J23 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-ent
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