Differences in Self-Employment Duration by Year of Entry & Pre-Entry Wage-Sector Attachment

The literature on the self-employed hypothesizes two different paths to self-employment. On the one hand, self-employment is associated with entrepreneurship and a motivation to pursue an opportunity. On the other hand, previous research indicates that people also become self-employed because of limited opportunities in the wage sector. Using a unique set of data that links the American Community Survey to Form 1040 and W-2 records, this paper extends the existing literature by examining self-employment duration for five consecutive entry cohorts, including two cohorts who entered self-employment during the Great Recession. Severely limited labor market opportunities may have driven many in the recession cohorts to enter self-employment, while those entering self-employment during the boom may have been pursuing opportunities under favorable market conditions. To more explicitly test the concept of “necessity” versus “opportunity” self-employment, we also examine the pre-entry wage labor attachment of entrants. Specifically, we ask whether an association exists between wage labor attachment and the duration of self-employment. We also explore whether the demographic/socio-economic characteristics and self-employment exit behavior of the cohorts are different, and if so, how. We find evidence consistent with the existence of “necessity” vs. “opportunity” self-employment types. Even when controlling for local economic conditions and the demographic/socio-economic characteristics of the self-employed, entrants with a more tenuous connection to the wage labor market exit self-employment earlier, and are more likely to transition from self-employment to unemployment.