Microentrepreneurship and the Business Cycle: Is Self-Employment a Desired Outcome?

Federico S. Mandelman and Gabriel V. Montes Rojas
Working Paper 2007-15
July 2007

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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.

Please address questions regarding content to Federico Mandelman, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8785, federico.mandelman@ atl.frb.org; or Gabriel Montes Rojas, the University of Illinois at Urbana-Champaign, 1206 South Sixth Street, 484 Wohlers Hall, Champaign, IL 61820, rmontes@uiuc.edu.

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.