Abstract
We investigate the determinants of variations in the reported relative earnings of self‐employed and paid‐employed workers in the United Kingdom, focusing in particular on the significant decline which has taken place since 1980. We find that the main factors behind this decline have been the rise in the rate of self‐employment itself and a reduction in the level of capital per self‐employed worker; effects which we associate with a decline in the quality of the average self‐employed business. Changes in the tax rates on income and in the sectoral composition of GDP helped to reduce the scale of the decline in self‐employment relative earnings to some degree.
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