Predicted earnings and the propensity for self‐employment

Abstract

PurposeThe purpose of this paper is to investigate the influence of the predicted earnings differential between self‐employment and wage‐employment on self‐employment propensities in Sweden using a large data set from the year 2003.Design/methodology/approachThe analysis in the paper is based on the presumption that the individual chooses to work in either the self‐employed or the wage‐employed sector. The separate earnings functions for the self‐employed and the wage‐employed are estimated in order to predict an individual's earnings in each sector. In order to overcome selectivity problems a Heckman approach is used at this stage. Finally, a structural probit model, where the difference in predicted earnings from the two sectors is included as an independent variable, is estimated.FindingsThe main result is that the predicted differential between self‐employment and wage‐employment earnings plays an important role for the self‐employment decision and that an increase in this earnings differential will lead to a higher self‐employment rate and to an increase in total employment in Sweden.Originality/valueThe policy relevance of this question is evident since previous research has shown that self‐employed individuals do not only create jobs for themselves but also for others. Thus, an increase in the earnings from self‐employment relative to the earnings from wage‐employment will increase the self‐employment rate as well as total employment.