On the misery of losing self-employment

Using German panel data, this study compares responses of self-employed workers’ well-being and paid employees’ well-being to the loss of work. The empirical analyses show that life satisfaction decreases substantially more in the probability of losing work when self-employed than when paid-employed. It also turns out that becoming unemployed yields a much stronger decline in self-employed workers’ life satisfaction than in paid employees’ life satisfaction. Although these results do not necessarily represent causal effects, they indicate that losing self-employment is an even more harmful life event than losing dependent employment. Further analyses substantiate this conclusion. It is also shown that non-monetary reasons may explain much more than monetary reasons why the self-employed seem to suffer in particular from unemployment. In addition, the difference in the responses of well-being to unemployment between self-employed workers and paid-employed workers originates from varying levels of life satisfaction after terminating work, but not from divergent levels of life satisfaction before terminating work. One implication of these findings is that the potential psychological cost of unemployment might constitute a risk that prevents workers from going into business by themselves.