The Role of Self-Employment in Developing Economies: Lifetime Evidence from a Structural Search Model

Workers in developing economies spend much of their careers self-employed, yet its consequences are rarely studied over the full career. We ask whether self-employment leads to wage work, how much reflects search frictions rather than preference, and what its removal would mean for employment and inequality. Using an on-the-job search model with endogenous participation, short panels and repeated cross-sections from Ecuador, where half of employment is self-employment, we simulate 50-year careers. Self-employed workers receive wage offers as often as the unemployed, while starting a career in self-employment delays wage employment for years without reducing lifetime income. Yet 79 percent of self-employment time is spent in activities workers would leave for a wage job paying their group’s average wage. Eliminating self-employment triples unemployment, raises non-participation among unskilled women from 42 to 63 percent, and reduces lifetime income by 17 percent overall and 46 percent for unskilled women. Inequality falls among workers but rises 14 percent when the jobless are included and 23 percent over full careers.