Learning to Be Self-Employed: Specific Capital Accumulation, Labour Mobility, and the Choice of Self-Employment

Abstract

Does the length of a worker’s prior experience as an employee later determine their choice of self-employment? If so, to what extent is this type of mobility attributable to genuine duration-dependence implied by specific capital accumulation? And then, what theoretical basis is the presence of specific capital attributable? To answers these questions, this paper uses longitudinal HILDA survey data of Australian workers to estimate a dynamic random-effects panel probit model of the probability of self-employment and isolate the impact of genuine duration-dependence on the likelihood that employees increasingly choose self-employment with increasing job-tenure. In doing so, this paper makes a departure from the heterogeneity-based explanations for self-employment common in the entrepreneurship literature and, instead, expands upon the well-established rationales for labour mobility and job-turnover in labour economics. While employee job-change and labour market mobility has long attracted the attention of labour economists, existing models ignore self-employment as the outside option. Of particular interest, therefore, is whether duration-dependence influences the probability of employees becoming self-employed either because the relative appeal of outside self-employment opportunities increase as ‘better’ employee job-offers from external firms diminish (as implied by Jovanovic’s theory of job-matching), or because the prospective opportunities in self-employment become increasingly valuable (as implied by Becker’s human-capital theory). This paper finds compelling evidence that the choice of self-employment is driven by the same economic forces that determine job-change and labour mobility more broadly. But, rather than strengthening worker-firm relationships, duration-dependence attributable to specific capital accumulation acts as a ‘double-edged sword’ increasing the probability of employees becoming self-employed with prolonged tenure.