Compensating income variation in health and subjective well-being for the self-employed

Abstract

Complementing growing interest in entrepreneurship and well-being, we apply a conceptualization of compensating income variation (CIV) – how much extra income an individual would require offsetting the loss in subjective well-being from a unit decline in health – in health economics to entrepreneurship. We hypothesize and test the extent of the CIV among the self-employed and whether the CIV varies by sex and age. We use a Bayesian vector auto-regression model in the Household, Income, and Labour Dynamics in Australia (HILDA) Survey data. We find that the CIV for the self-employed (employed) was AUD 10,315 (AUD 6,873) annually for a unit decrease in subjective well-being. We do not find significant differences in the CIV among the self-employed by sex and age. The findings show that the self-employed requires higher compensatory income to accept poorer health.