Abstract
The literature on the self-employed hypothesizes two different paths to self-employment. On the one hand, self-employment is associated with entrepreneurship and a motivation to pursue an opportunity. On the other hand, previous research indicates that people also become self-employed because of limited opportunities in the wage sector. Using a unique set of data that links the American Community Survey to Form 1040 and W-2 records, this paper extends the existing literature by examining self-employment duration for five consecutive entry cohorts, including two cohorts who entered self-employment during the Great Recession. Severely limited labor market opportunities may have driven many in the recession cohorts to enter self-employment, while those entering self-employment during the boom may have been pursuing opportunities under favorable market conditions. To more explicitly test the concept of “necessity” versus “opportunity” self-employment, we also examine the pre-entry wage labor attachment of entrants. Specifically, we ask whether an association exists between wage labor attachment and the duration of self-employment. We also explore whether the demographic/socio-economic characteristics and self-employment exit behavior of the cohorts are different, and if so, how. We find evidence consistent with the existence of “necessity” vs. “opportunity” self-employment types. Even when controlling for local economic conditions and the demographic/socio-economic characteristics of the self-employed, entrants with a more tenuous connection to the wage labor market exit self-employment earlier, and are more likely to transition from self-employment to unemployment.
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Notes
In contrast to Fairlie and Fossen’s paper, we define four different categories of pre-entry labor market attachment based on the number of weeks worked rather than unemployed/employed.
See https://www.census.gov/programs-surveys/acs/ for more information on the ACS.
A sole proprietorship is an unincorporated business owned and run by one individual. A partnership is an unincorporated business owned and run by more than one person.
Results available upon request.
Hurst & Pugsley (2015) offer an additional perspective for why individuals may become entrepreneurs. They emphasize the role of non-pecuniary benefits and entrepreneurs’ tastes for entering self-employment, and how these should be taken into consideration when designing policies aimed at benefiting entrepreneurship.
As mentioned earlier, our identification of opportunity and necessity types is consistent with those in the most recent literature (Fairlie & Fossen, 2018).
It is difficult to categorize 2007 as a boom or recession year since the official start of the Great Recession was December of 2007, and economic conditions deteriorated throughout that year (see Elsby et al., 2010).
See Fairlie & Fossen (2018).
Results showing all groups available upon request.
As mentioned earlier, please note that our self-employed sample does not include incorporated businesses since our tax data provides information only on whether individuals filed schedules C and SE. The exploration of incorporated as well as unincorporated self-employed individuals is left to future work as additional data becomes available.
The percentage of self-employed individuals with one-year gaps in self-employment is approximately 12% in the 2009 cohort, 15% in the 2008 cohort, 17% in the 2007 and 2006 cohorts and 36% in the 2005 cohort.
Statistical significance was determined according to a Chi-squared test. We also examined sex, Hispanic origin, citizenship status, home ownership, and industry, but these did not vary between cohorts.
For example, in 2005 Black alone represented 2.8% and in 2008, 4.4%; in 2005 Asian alone represented 4.2% and in 2008, 4.4%.
For example, in 2005 those with a BS/BA represented 22 and in 2008, 23.1%; the comparable rates for Masters/PhD were 14.2 and 14.8, while for less than a high school degree the comparable rates were 7.8 and 7.1.
In addition to labor market attachment, we also looked at household adjusted gross income and wage and salary income as reported on the 1040 (results available on request). This information reflects resources and labor market attachment at the household, rather than individual, level. We found that earnings and adjusted gross income decreased substantially for self-employment entrants between the 2008 and 2009 cohorts. The same measures for existing self-employed and wage-sector earners also decreased, but not as steeply.
In addition, as mentioned earlier, due to the potential for the pre-entry wage employment status to be endogenously determined, we conduct a sensitivity analysis consisting of a Heckman selection correction. Our results with and without the correction are very similar and do not quantitatively change. Results are available upon request.
Individuals that remain self-employed up to our last time period are treated as right-censored observations.
Because our analytic sample is selected based on attributes that do not enter into the calculation of weights, our logit estimation uses unweighted data.
These results are available upon request.
Specifically, these are averaged predicted probabilities for each group calculated using the actual or observed values of the covariates.
A robustness check indicated that our results were not sensitive to excluding college-age adults from our sample.
The only exception is the 27–39 group for the 2005 cohort in 2008 and 2010.
Results available upon request.
Similarly to the binomial results, a robustness check indicated that our multinomial results were not sensitive to excluding college-age adults from our sample.
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Luque, A., Jones, M.R. Differences in Self-Employment Duration by Year of Entry & Pre-Entry Wage-Sector Attachment. J Labor Res 40, 24–57 (2019). https://doi.org/10.1007/s12122-018-9275-x
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DOI: https://doi.org/10.1007/s12122-018-9275-x
Keywords
- Self-employment
- Entrepreneurship
- Necessity entrepreneur
- Opportunity entrepreneur
- Self-employment duration
- Great recession