This paper links employment dynamics to the business cycle in order to examine the voluntary nature of self-employment in Argentina. Our results suggest that the transition to self-employment is more common during recessions and that the likelihood of becoming self-employed increases with the length of the recession and the unemployment duration. We find that the majority of self-employed workers do not have employees and earn significantly less than salaried workers. Individuals in this sector are often young and less educated and have trouble obtaining a salaried position regardless of the macroeconomic conditions. Middle-aged, college-educated individuals also tend to enter self-employment as a temporary refuge when they encounter difficulties during a recession. Our results suggest, however, that for entrepreneurs who have employees, entry into self-employment is procyclical and voluntary and has characteristics similar to those predicted for highly skilled risk-taking entrepreneurs. Including idiosyncratic entrepreneurial abilities in a standard job search model allows us to predict such labor market segmentation and the cyclical pattern of entrance into self-employment.
JEL classification: J23, L25, E32
Key words: microfirms, self-employment, business cycles
The authors thank Maria Laurel Graefe for superb research assistance and very useful suggestions. They also thank Pablo Acosta, Julie Hotchkiss, and Lucas Siga for very helpful comments. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
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