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Great opportunities or poor alternatives: self-employment, unemployment and paid employment over the business cycle

Author

Listed:
  • Ludo Visschers

    (Universidad Carlos III, Madrid and University of Edinburgh)

  • Ana Millan

    (Universidad Carlos III de Madrid)

  • Matthias Kredler

    (Universidad Carlos III Madrid)

Abstract

In this paper, we study the flows between self-employment, unemployment and paid employment, and how these vary over the business cycle. First, we document these flows in the data, paying particular attention to previous labor market outcomes for workers entering self-employment, and subsequent labor market outcomes for those leaving self-employment, and how these are affected by cyclical conditions. Second, we construct a two-ladder equilibrium model of a frictional labor market capturing these flows: workers search both on and off the job, and receive business ideas while in any of the three states: self-, paid employment and unemployment. We study this model in an environment with aggregate shocks, which affect both the productivity of matches in the paid-employment sector, and the profitability of ideas for the self-employed. Third, we (plan to) calibrate to see how well it can quantitatively account for observed patterns over the business cycle. These allow us to have a notion of entry into self- employment by "opportunity" (highly profitable ideas), and "necessity" (lack of alternatives in paid employment), and how these vary over the business cycle, and to quantify "prosperity pull" of self-employment in good times, and "recession push" in bad times. Finally, we plan to study the impact of labor market policies on self-employment, and on unemployment, taking into account the option to enter self-employment.

Suggested Citation

  • Ludo Visschers & Ana Millan & Matthias Kredler, 2014. "Great opportunities or poor alternatives: self-employment, unemployment and paid employment over the business cycle," 2014 Meeting Papers 597, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:597
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    References listed on IDEAS

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    1. Costas Meghir & Renata Narita & Jean-Marc Robin, 2015. "Wages and Informality in Developing Countries," American Economic Review, American Economic Association, vol. 105(4), pages 1509-1546, April.
    2. Poschke, Markus, 2013. "Who becomes an entrepreneur? Labor market prospects and occupational choice," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 693-710.
    3. Guido Menzio & Shouyong Shi, 2011. "Efficient Search on the Job and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 468-510.
    4. Ludo Visschers & Carlos Carrillo-Tudela, 2011. "Unemployment and Endogenous Reallocation over the Business Cycle," 2011 Meeting Papers 1101, Society for Economic Dynamics.
    5. Roy Thurik, 2014. "Entrepreneurship and the business cycle," IZA World of Labor, Institute of Labor Economics (IZA), pages 1-90, October.
    6. Jake Bradley & Fabien Postel-Vinay & Hélène Turon, 2017. "Public Sector Wage Policy and Labor Market Equilibrium: A Structural Model," Journal of the European Economic Association, European Economic Association, vol. 15(6), pages 1214-1257.
    7. Ellen R. Rissman, 2003. "Self-employment as an alternative to unemployment," Working Paper Series WP-03-34, Federal Reserve Bank of Chicago.
    8. Audretsch, David B & Acs, Zoltan J, 1994. "New-Firm Startups, Technology, and Macroeconomic Fluctuations," Small Business Economics, Springer, vol. 6(6), pages 439-449, December.
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    10. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-535, June.
    11. Bhashkar Mazumder, 2007. "New evidence on labor market dynamics over the business cycle," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 36-46.
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    Cited by:

    1. Gaillard, Alexandre & Kankanamge, Sumudu, 2018. "Entrepreneurship, Labor Market Mobility and the Role of Entrepreneurial Insurance," TSE Working Papers 18-929, Toulouse School of Economics (TSE), revised Feb 2019.
    2. Renata Narita, . "Self-Employment in Developing Countries: A Search-Equilibrium Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    3. Renata Narita, . "Self-Employment in Developing Countries: A Search-Equilibrium Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    4. Poschke, Markus, 2019. "Wage Employment, Unemployment and Self-Employment across Countries," IZA Discussion Papers 12367, Institute of Labor Economics (IZA).

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