The Labour Market Consequences of Self-Employment Spells: European Evidence

Abstract

Hundreds of thousands of Europeans enter self-employment each year, but because self-employment spells are typically brief, many of them exit soon after entry. We examine how those who return to paid-employment fare on the labour market using the European Community Household Panel (ECHP). Like earlier evidence for the US, ours indicate that, in general, brief spells of self-employment do not increase average hourly earnings upon return to paid-employment. For highly educated men, an additional year of self-employment actually decreases their earnings by 4-5% relative to a year of continued wage employment. We also find that brief spells of self-employment are associated with increased probability of part-time employment upon returning to the wage sector, which may be interpreted as difficulties in re-entering the wage sector. There is also some indication that men returning to paid-employment after a spell of self-employment have lower job-related satisfaction and a worse financial situation when compared to those who continued in the wage sector. While the stigma of failure that stems from the self- and/or unemployment spells is higher for the more educated rather than for the less educated, the difference in these effects suggests that, as compared to self-employment, unemployment is more detrimental for the more educated. We also document that while self-employed, better educated men are more likely to seek new (paid) employment. This finding suggests that for them, self-employment might in part be unemployment in disguise.