Unraveling the relationship between the business cycle and the own-account worker’s decision to hire employees

Abstract

We study the role of the business cycle in the individual decision of own-account workers to hire employees. Using panel data from the European Community Household Panel for the EU-15 countries, we show that own-account workers are less likely to hire employees during recessions. Next, we focus on identifying the underlying mechanisms of this negative relationship, while bearing in mind that liquidity constraints, unemployment and the prevalence of unpaid family workers are more common during recessions. First, we observe how liquidity constraints reduce the probability of transitioning from own-account worker to employer. Second, additional results from our paper suggest that formal education and former work experience (both work experience in paid employment and venture-specific work experience) are important assets for own-account workers which increase the probability that they create new jobs. Third, as a mechanism partly offsetting the lower probability of job creation during recessions, we also find that own-account workers who are assisted by unpaid family workers are more likely to start employing (salaried) personnel.