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Self Employment in Developing Countries: a Search-Equilibrium Approach

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  • Renata Narita

Abstract

Self employment comprises around thirty percent of the workforce in Latin America. Most self employed evade payroll taxes, have low education, and run small businesses requiring low skills. I develop and estimate a life cycle search model where workers can be wage earners in the formal or informal sector, self employed or unemployed. Firms in the formal sector pay payroll and severance taxes, and in the informal sector, they can be fined. The estimated model (i) reproduces well the composition of workers over the life cycle as observed in Brazilian Labour Force data, and (ii) shows that the job value of the self employed is similar to that of informal wage earners. The model is used as a tool to evaluate the welfare impact of labour market policies, where self employment may be an option. When simulating an increase in the cost of informality by ten percent, results showed (i) small impact on employment composition and informality; (ii) significant cost pass-through to wages in the informal sector, meaning a reduction in the lowest wages in the economy, hence higher wage inequality. On the other hand, (iii) it led to substantial improvement in the welfare of formal firms and of all workers. These results prove that taking into account labour market frictions is important in welfare analyses of policies in multisectoral labour markets. As simulations which increase the cost of informality suggest, stricter enforcement of labour regulations (at least to a certain degree) can be a way towards efficient labor markets.

Suggested Citation

  • Renata Narita, 2013. "Self Employment in Developing Countries: a Search-Equilibrium Approach," Working Papers, Department of Economics 2013_21, University of São Paulo (FEA-USP).
  • Handle: RePEc:spa:wpaper:2013wpecon21
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    Cited by:

    1. Luca Flabbi & Mauricio Tejada, 2022. "Working and Saving Informally: The Link between Labor Market Informality and Financial Exclusion," CHILD Working Papers Series 105 JEL Classification: J, Centre for Household, Income, Labour and Demographic Economics (CHILD) - CCA.
    2. Emin Dinlersoz & Henry Hyatt & Hubert Janicki, 2019. "Who Works for Whom? Worker Sorting in a Model of Entrepreneurship with Heterogeneous Labor Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 244-266, October.
    3. 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.
    4. Jake Bradley, 2016. "Self-employment in an equilibrium model of the labor market," IZA Journal of Labor Economics, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-30, December.
    5. Albertini, Julien & Terriau, Anthony, 2019. "Informality over the life-cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 182-202.
    6. Girsberger, Esther Mirjam & Meango, Romuald, 2022. "The Puzzle of Educated Unemployment in West Africa," IZA Discussion Papers 15721, Institute of Labor Economics (IZA).
    7. Camila Cisneros-Acevedo & Alessandro Ruggieri, 2022. "Firms, policies, informality, and the labour market," Discussion Papers 2022-11, University of Nottingham, GEP.
    8. Finkelstein-Shapiro, Alan & Sarzosa, Miguel, 2012. "Unemployement Protection for Informal Workers in Latin America and the Caribbean," IDB Publications (Working Papers) 4542, Inter-American Development Bank.
    9. Eliane Badaoui & Olivier Bargain & Prudence Magejo & Eric Strobl & Frank Walsh, 2023. "A Search Model with Self-Employment and Heterogeneity in Managerial Ability," EconomiX Working Papers 2023-9, University of Paris Nanterre, EconomiX.
    10. Achkasov, Yu. & Pilnik, P., 2017. "Income Tax Effect on Economic Performance in Terms of Endogenous Choice between Labor and Enterprise Market," Journal of the New Economic Association, New Economic Association, vol. 33(1), pages 12-27.
    11. Denderski, Piotr & Sniekers, Florian, 2021. "Declining Search Frictions and Type-of-Employment Choice," Discussion Paper 2021-010, Tilburg University, Center for Economic Research.
    12. Simplice A. Asongu & Nicholas M. Odhiambo, 2023. "The role of financial inclusion in moderating the incidence of entrepreneurship on energy poverty in Ghana," Working Papers of the African Governance and Development Institute. 23/035, African Governance and Development Institute..
    13. repec:hal:spmain:info:hdl:2441/4ra95789n9nrr59b6lmini6tp is not listed on IDEAS
    14. Amodio, Francesco & Medina, Pamela & Morlacco, Monica, 2022. "Labor Market Power, Self-Employment, and Development," CEPR Discussion Papers 17543, C.E.P.R. Discussion Papers.
    15. Thiago Scarelli & David N Margolis, 2022. "When You Can't Afford to Wait for a Job: The Role of Time Discounting for Own-Account Workers in Developing Countries," Working Papers halshs-03288728, HAL.
    16. Poschke, Markus, 2019. "Wage Employment, Unemployment and Self-Employment across Countries," IZA Discussion Papers 12367, Institute of Labor Economics (IZA).
    17. Flabbi, Luca & Tejada, Mauricio, 2023. "Are Informal Self-Employment and Informal Employment as Employee Behaviorally Distinct Labor Force States?," IZA Discussion Papers 16225, Institute of Labor Economics (IZA).
    18. Matteo Bobba & Luca Flabbi & Santiago Levy, 2022. "Labor Market Search, Informality, And Schooling Investments," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(1), pages 211-259, February.
    19. Jonathan Lain, 2019. "Discrimination in a search and matching model with self-employment," IZA Journal of Migration and Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 9(1), pages 1-35, December.
    20. Emin Dinlersoz & Henry Hyatt & Hubert Janicki, 2019. "Who Works for Whom? Worker Sorting in a Model of Entrepreneurship with Heterogeneous Labor Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 244-266, October.
    21. Adams, Abass & Cantah, William Godfred & Wiafe, Emmanuel Agyapong, 2014. "Income Insecurity, Job Insecurity and the Drift towards Self-employment in SSA," MPRA Paper 59615, University Library of Munich, Germany.
    22. Abubakar Haruna & Zipporah Oyigbenu Elijah & Hussaina Abdullahi Yarima, 2022. "Youth Employment, Security and Poverty in Nigeria," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 6(10), pages 698-701, October.
    23. M. Antonella Mancino, 2022. "A Search Model Of Early Employment Careers And Youth Crime," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(1), pages 329-390, February.
    24. Amaral, Ernesto F. L. & Faustino, Samantha Haussmann Rodarte & Gonçalves, Guilherme Quaresma & Queiroz, Bernardo L, 2019. "Economic sector, demographic composition, educational attainment, and earnings in Brazil," OSF Preprints vz4sa, Center for Open Science.
    25. Jonathan Lain, 2016. "Discrimination in a Search-Match Model with Self-Employment," CSAE Working Paper Series 2016-02, Centre for the Study of African Economies, University of Oxford.

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    More about this item

    Keywords

    Self employment; Occupational choice; Informal Sector; Job Search; Labour market welfare;
    All these keywords.

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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