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Self-employment in the global economy

Author

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  • Federico J. Díez
  • Ali K. Ozdagli

Abstract

This paper studies the eff ects of foreign competition on self-employment levels. We begin by pointing out a previously unknown fact: the greater the exposure to foreign competition, the smaller the fraction of self-employed people. This fact holds across very different countries, across relatively similar countries like European Union members, and across industries within the United States. We develop a model where heterogeneous agents select themselves into being either employees or self-employed in the spirit of Lucas (1978). This, in turn, translates into intra-industry firm heterogeneity as in Melitz (2003). Self-employed agents (firms) can also decide to enter into the export markets, subject to fixed and variable trade costs. The model delivers three basic predictions: (1) domestic self-employment increases with the trade costs of exporting from a foreign country to the home country, (2) domestic self-employment increases with the trade costs of exporting to the foreign country, and (3) higher levels of self-employment are associated with a lower fraction of exporting firms. Our empirical work on inter-industry data for the United States confirms these predictions of the model.

Suggested Citation

  • Federico J. Díez & Ali K. Ozdagli, 2011. "Self-employment in the global economy," Working Papers 11-5, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbwp:11-5
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    References listed on IDEAS

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    Keywords

    Self-employed ; International trade ; Tariff;

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