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Self-employment as an alternative to unemployment

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  • Ellen Rissman
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    Abstract

    Data from the NLSY show that more than a quarter of all younger men experience some period of self- employment. Many of them return to wage work. This paper analyzes a simple model of job search and self- employment where self- employment provides an alternative source of income for unemployed workers. Self- employment is distinct from wage sector employment in two important respects. First, self- employment is a low-income, low- variation alternative to wage work. Second, once a worker enters self-employment, he loses eligibility to receive unemployment insurance benefits—at least until he returns to wage sector employment. The model suggests that flows into self-employment are countercyclical and flows out of self-employment are procyclical. Data from the NLSY for males at least 21 years of age are used to investigate how demographic and economic variables influence the decision to become self- employed. Fixed effects and random effects logit results indicate that young men are more likely to be self-employed when their wage work opportunities are more limited. Specifically, higher local unemployment rates lead workers to self- select into self-employment, as does past unemployment experience. The process is different for Whites and Nonwhites with education being irrelevant for White self- employed workers. In contrast, for Nonwhites higher education reduces the probability of entering self-employment.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-03-34.

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    Date of creation: 2003
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    Handle: RePEc:fip:fedhwp:wp-03-34

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    Keywords: Self-employed ; Unemployment;

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    References

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    1. Vincenzo Quadrini, 2000. "Entrepreneurship, Saving and Social Mobility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 1-40, January.
    2. Moshe Buchinsky & Jennifer Hunt, 1999. "Wage Mobility In The United States," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 351-368, August.
    3. Mortensen, Dale T, 1970. "Job Search, the Duration of Unemployment, and the Phillips Curve," American Economic Review, American Economic Association, vol. 60(5), pages 847-62, December.
    4. Holtz-Eakin, D. & Joulfaian, D. & Rosen, H.S., 1992. "Entrepreneurial Decisions and Liquidity Constraints," Papers 129, Princeton, Department of Economics - Financial Research Center.
    5. David Blanchflower & A Oswald, 1991. "Self-Employment and Mrs Thatchers Enterprise," CEP Discussion Papers dp0030, Centre for Economic Performance, LSE.
    6. Blau, David M, 1987. "A Time-Series Analysis of Self-employment in the United State," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 445-67, June.
    7. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
    8. Bruce D. Meyer, 1990. "Why Are There So Few Black Entrepreneurs?," NBER Working Papers 3537, National Bureau of Economic Research, Inc.
    9. Hellwig, Martin & Irmen, Andreas, 2001. "Endogenous Technical Change in a Competitive Economy," Journal of Economic Theory, Elsevier, vol. 101(1), pages 1-39, November.
    10. Carrasco, R., 1997. "Transitions to and from Self-Employment in Spain: An Empirical Analysis," Papers 9710, Centro de Estudios Monetarios Y Financieros-.
    11. Blanchflower, David G & Oswald, Andrew J, 1998. "What Makes an Entrepreneur?," Journal of Labor Economics, University of Chicago Press, vol. 16(1), pages 26-60, January.
    12. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-35, June.
    13. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1993. "Sticking it Out: Entrepreneurial Survival and Liquidity Constraints," NBER Working Papers 4494, National Bureau of Economic Research, Inc.
    14. Marco Cagetti & Mariacristina De Nardi, 2005. "Entrepreneurship, frictions, and wealth," Working Paper Series WP-05-09, Federal Reserve Bank of Chicago.
    15. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, December.
    16. Robert W. Fairlie & Bruce D. Meyer, 2000. "Trends in Self-Employment among White and Black Men during the Twentieth Century," Journal of Human Resources, University of Wisconsin Press, vol. 35(4), pages 643-669.
    17. William D. Bradford, 2003. "The Wealth Dynamics of Entrepreneurship for Black and White Families in the U.S," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 49(1), pages 89-116, 03.
    18. Dunn, Thomas & Holtz-Eakin, Douglas, 2000. "Financial Capital, Human Capital, and the Transition to Self-Employment: Evidence from Intergenerational Links," Journal of Labor Economics, University of Chicago Press, vol. 18(2), pages 282-305, April.
    19. Josh Lerner, 2002. "When Bureaucrats Meet Entrepreneurs: The Design of Effective "Public Venture Capital" Programmes," Economic Journal, Royal Economic Society, vol. 112(477), pages F73-F84, February.
    20. Javier Díaz-Giménez & Vincenzo Quadrini & José-Víctor Ríos-Rull, 1997. "Dimensions of inequality: facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-21.
    21. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
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    Cited by:
    1. Marco Cagetti & Mariacristina De Nardi, 2003. "Entrepreneurship, frictions and wealth," Working Papers 620, Federal Reserve Bank of Minneapolis.
    2. Román, Concepción & Congregado, Emilio & Millán, José María, 2013. "Start-up incentives: Entrepreneurship policy or active labour market programme?," Journal of Business Venturing, Elsevier, vol. 28(1), pages 151-175.
    3. Michaelides, Marios, 2010. "Race and self-employment: The role of training programs, self-employment background, and access to financing," MPRA Paper 20884, University Library of Munich, Germany.
    4. Kartik Athreya & Ahmet Akyol, 2009. "Credit and self-employment," Working Paper 09-05, Federal Reserve Bank of Richmond.
    5. Michaelides, Marios & Benus, Jacob, 2012. "Are self-employment training programs effective? Evidence from Project GATE," Labour Economics, Elsevier, vol. 19(5), pages 695-705.
    6. Ellen R. Rissman, 2006. "The self-employment duration of younger men over the business cycle," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 14-27.
    7. Congregado, Emilio & Golpe, Antonio A. & Carmona, Mónica, 2010. "Is it a good policy to promote self-employment for job creation? Evidence from Spain," Journal of Policy Modeling, Elsevier, vol. 32(6), pages 828-842, November.
    8. Ralitza Dimova & Ira N. Gang, 2006. "Self-Selection And Wages During Volatile Transition," CEDI Discussion Paper Series 06-03, Centre for Economic Development and Institutions(CEDI), Brunel University.
    9. Ellen Rissman, 2007. "Labor market transitions and self-employment," Working Paper Series WP-07-14, Federal Reserve Bank of Chicago.
    10. Naude, Wim, 2008. "Entrepreneurship in Economic Development," Working Paper Series RP2008/20, World Institute for Development Economic Research (UNU-WIDER).

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