Abstract
This paper extends the Lucas (1978) model of occupational choices by individuals with different skills, beyond the simple options of self-employment or wage-employment, by including a second choice for the self-employed. That is, an option to hire employees and so become self-employed with employees (SEWEs), or to be self-employed without employees (SEWNEs). We solve for the market equilibrium and examine the sensitivity of relative sizes of occupational groups, and of the level of productivity, tochanges in the exogenous parameters. The results show that the positive (negative) association between number of SEWEs (SEWNEs) and productivity, observed in the Spanish data, can be explained, under certain conditions, as the result of cross-region and time differences in average skills. These findings point to the importance of distinguishing between SEWEs and SEWNEs in drawing valid conclusions concerning any link between entrepreneurship and economic development.
Highlights
This paper considers the determinants of occupation structure in economies where individuals who differ in skills make occupational choices in response to monetary incentives
We examine the sensitivity of the occupational structure and average productivity to changes in certain exogenous parameters of the model and relate the theoretical predictions to empirical regularities observed in the relationship between self-employment rates and economic development, in general, and for the Spanish economy
We first model the production function for entrepreneurs who hire employees, self-employed with employees (SEWEs), and for those who work on their own, SEWNEs; we solve for the equilibrium occupational groups, and total output produced in an economy with three occupational choices
Summary
This paper considers the determinants of occupation structure in economies where individuals who differ in skills make occupational choices in response to monetary incentives. We find that the time-increasing lower bound in the distribution of skills (due to, for example, improvements in education levels of the population) is an important driver of the cross-regional and over-time evolution of occupational rates and productivity for the Spanish economy in the period (1980– 2006).3 This result is connected to other recent evidence on the human capital of entrepreneurs as a driver of economic growth (Gennaioli et al 2013). Another related literature includes work that explains the actual occupational choice using individual level data (Evans and Jovanovic 1989; Evans and Leighton 1989; Carrasco 1999; Dunn and Holtz-Eakin 2000; Dawson et al 2009). The conclusions summarise our main results and point to areas for further study
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