Self-employment earnings premiums/penalties and regulations: evidence from developing economies

Abstract

This paper investigates the relationship between countries’ regulatory environment, as measured through business, credit, labor and trade regulations, and the wage premium or penalty associated with self-employment over the period of 1970 to 2011. When considering all self-employed workers, there is no evidence that labor market regulations are associated with overall earnings penalties or premiums. However, stricter business regulations and bureaucratic red tape that restrict starting, operating, or closing a business are associated with increased earnings penalties for non-professional own-account self-employed workers, as well as premiums for employers and own-account professionals. Both more regulated trade and increased credit availability are correlated with increased earnings penalties for all self-employed workers. The association is consistently larger and more robust for female self-employed workers compared to men. These findings are consistent with regulatory restrictions on business entry and access discouraging more productive workers, particularly women, from entering non-professional own-account self-employment.