The Effect of Self-Employment on Income Inequality

Stefan Schneck

doi:10.2139/ssrn.3292967

Abstract

It is well known that the self-employed are over-represented at the bottom as well as the top of the income distribution. This paper shifts the focus from the income situation of the self-employed to the distributive effects of a change in self-employment rates. With representative German data and unconditional quantile regression analysis we show that an increase in the proportion of self-employed individuals in the labor force increases income polarization by tearing down floors at the bottom and allowing higher earnings potentials at the very top of the hourly income distribution. Recentered influence function regression of inequality measures corroborate that self-employment is a source of income inequality in the labor market.

Highlights

A considerable part of active labor market policy aims at fostering entrepreneurship or self-employment, respectively
We start with the presentation of results obtained with the conditional quantile approach and switch to the results estimated by recentered influence function (RIF) regressions
In order to draw more robust inference, we examine the effect of an increase in self-employment on income inequality by application of a variety of different RIF regressions of inequality measures

Summary

Introduction

A considerable part of active labor market policy aims at fostering entrepreneurship or self-employment, respectively. It has become common knowledge that the median self-employed earns less than median employee (Hamilton, 2000). For this reason, the majority of self-employed is worse off in term of pay when compared to employees. The self-employed, achieve higher average incomes than paid employees, which is usually due to superstar entrepreneurs with very high incomes. Only few superstar entrepreneurs are responsible for the higher average incomes, while most self-employed achieve lower than average incomes, entrepreneurship policy should pay attention to the distributive effects. We ask how a rise in self-employment shapes the income distribution and to what extent

Methods

Results

Conclusion