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Self-Employment and Labor Market Policies

We develop a model of self-employment in the search and matching frame-work of Mortensen and Pissarides. We integrate two strands of theoretical literature: models of self-employment and models of unemployment. Our model explains many empirical findings which are not explained by the existing models of self-employment. In our model, higher minimum wage and unemployment benefits have negative effect on self-employment. These results are supported by empirical evidence. In addition, in our model self-employed earn less, on average, than wage employed workers in equilibrium due to frictions in the labor market. Thus our model provides a novel explanation to one of the key puzzles identified in the empirical literature. We also find that a higher business tax and a lower wage tax reduce self-employment.

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Paper provided by Department of Economics, University of Victoria in its series Department Discussion Papers with number 0704.

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Length: 53 pages
Date of creation: 05 Oct 2007
Date of revision:
Handle: RePEc:vic:vicddp:0704
Note: ISSN 1914-2838
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