Research Paper Working Papers of the ESRC Research Centre on Micro-Social Change 26
Earnings, independence or unemployment: why become self -employed?
01 Jan 1994
Self-employment is receiving increasing attention in the economics literature, due at least in part to the growth in the number of self-employed through the 1980s. Indeed, self- employment is now widely regarded as a distinct labour market state as opposed to a form of paid employment. Given this, the obvious question to ask is why do some individuals choose self-employment over paid employment? Economists will always provide the same response - utility maximisation. A rational individual will select into the state that maximises his/her utility. This paper attempts to estimate the role played by three key variables (namely expected earnings, the desire for independence and the ability to paid employment) in this utility maximisation scenario, and hence their influence on this self-employment/paid employee choice problem, using a simple three stage model. The empirical results suggest that individuals are attracted to self-employment because of higher expected earnings relative to paid employment and by the freedom from managerial constraints that it offers, and that self- employment appears to be pro-cyclical. Age, industry and occupation also clearly emerge as significant determinants of self-employment.