Declining Search Frictions and Type-of-Employment Choice

Abstract

Do more people choose to become self-employed when search frictions decline? The origin story of the gig economy suggests that improvements in communication technologies increase the self-employment rate, while cross-country evidence suggests the opposite. We reconcile conventional wisdom with the data by introducing frictions in labour and goods markets in a new model of self-employment. Declining labour market frictions decrease self-employment, while declining goods market frictions increase self-employment. We study the impact of the most salient recent reduction in frictions - the roll-out of broadband Internet - in a panel of OECD countries. We find that the effect of declining goods market frictions dominates: the arrival of broadband Internet has halted three quarters of the average downward trend in self-employment rates.