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Estimating labor supply in self-employment: Pitfalls and resolutions

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  • Lechmann, Daniel S. J.

Abstract

The small extant literature on the working hours of self-employed workers is deficient, because it often lacks a clear theoretical underpinning and suffers from three common mistakes: including the hourly wage as an explanatory variable, controlling for input factors of production, and not considering endogenous selection of self-employed workers. I introduce a structural causal model that makes clear that neither the wage nor input factors such as the number of employees or the amount of capital invested are determinants of working hours in self-employment. It also shows why selection bias arises when using a sample of self-employed individuals. I present an empirical discrete choice labor supply model that resolves these issues. Estimating this model with German data, I find that both non-labor income and education negatively affect labor supply in self-employment.

Suggested Citation

  • Lechmann, Daniel S. J., 2017. "Estimating labor supply in self-employment: Pitfalls and resolutions," Discussion Papers 101, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
  • Handle: RePEc:zbw:faulre:101
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    References listed on IDEAS

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    More about this item

    Keywords

    Germany; labor supply; self-employment; SOEP; structural causal model; working hours;
    All these keywords.

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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