Gross Labor Market Flows, Self-Employment, and Unemployment Insurance

Abstract

In the data, entrepreneurship contributes to the micro and macro-level patterns of gross labor market flows and the selection into that occupation is highly responsive to labor market policy changes. Using an occupational choice model of employment, unemployment, and entrepreneurship, we show that search frictions over all three occupations and a technology letting entrepreneurs produce with their own labor, business capital, or both, are pivotal in rationalizing observed aggregate gross flows and behaviors along the wealth and ability dimensions. The responsiveness of our model flows to variations in unemployment insurance generosity is consistent with US empirical estimates. Changes in the relative riskiness of occupations drive this responsiveness. In turn, beyond the direct effects on unemployment, large reallocations between entrepreneurship and employment appear, shaping aggregate occupational shares. Using our framework, we show that the successive unemployment insurance extensions during the Great Recession have decreased the entrepreneurship rate by 0.4pp.