The Economics of Self-Employment

05/11/2010
The Economics of Self-Employment
Staff:
Dr Chris Dawson (Course teacher); room F4;
cgd@aber.ac.uk
Texts:
Black, J., D. de Meza and D.Jeffreys (1996), House Prices, the Supply of
Collateral and the Enterprise Economy, Economic Journal, 106(434): 60-75.
Blanchflower, D.G. and A.J. Oswald (1998), What Makes an Entrepreneur?

Journal of Labour Economics, 16(1): 26-60.
Georgellis, Y., Sessions, J.G. and Tsitsianis, N. (2005), Windfalls, Wealth and the
Transition to Self-Employment, Small Business Economics, 13(2):407-428.
Arabsheibani, G., De Meza, D., Maloney, J. and B. Pearson (2000), And a Vision
Appeared Unto them of a Great Profit: Evidence of Self-Deception Among the
Self-Employed, Economics Letters, 67(1): 35-41.
Dawson, C., A. Henley & P. Latreille (2009).Why Do Individuals Choose SelfEmployment? IZA Discussion Paper, No. 3974.
05/11/2010

Why study the self-employed?
Create new employment opportunities
Innovative activity transmission mechanism for
economic growth.
Accounts for approximately 12.5% of the
workforce.
Who are entrepreneurs?

Definitional understanding undertaking a
commercial venture.
Schumpeterian entrepreneur innovative
activity.
Knightian risk taking.
Kirznerian perceiving and seizing new
profit opportunities
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Labour economists rely predominately on selfemployment data.

Issues
Characteristics of entrepreneurship and the

environment of entrepreneurship.
Relative earnings, human and social capital
Earnings
Differential
Human Capital Age and Experience
Education
Social Capital
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Personal characteristics and family circumstances

Marital
Status
Ill Health and Disability
Family Background
Psychological factors
Need
for Achievement
Love of Independence and Job Satisfaction
Reason (percentage)
To be independent/a change
Wanted more money
For better conditions of work
Family commitments/wanted to work
at home
Opportunity arose capital, space,
equipment available
Saw the demand
Joined the family business
Nature of the occupation
No jobs available (locally)
Made redundant
Other reasons
No reason given
N
All
30.2
12.7
5.4
Men
32.3
14.5
6.0
Women
24.9
8.0
4.0
t-test pvalue
0.000
0.000
0.000
7.7
2.2
21.5
0.000
12.5
8.8
6.9
21.5
3.4
9.3
14.6
3.4
17507
12.7
8.8
6.6
21.1
3.7
11.6
13.8
3.7
12582
12.1
8.6
7.6
22.5
2.4
3.6
16.6
2.5
4925
0.291
0.722
0.025
0.030
0.000
0.000
0.000
0.000
05/11/2010
The Economics of Self- Employment

Over Optimism
Unrealistic
Optimism
Credit
Rationing
High/Poor
Quality Entry
Rates
Negative
Expected
Returns
CM
Excess
Lending
High
Business
Failure
Rates
Attitudes Towards Risk
Henley et al. (2008). Decomposition techniques are

applied to survey data of 649 students from across
Europe.
Aspirations
40.5% of males students
24% of female students.
- Risk attitudes explains approximately 50% of the
total gap in entrepreneurial intent across gender.
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Entrepreneurship and Macroeconomic Factors

Changing
Industrial Structure
60
40
20
0
Employment by Industry
80
Employment by Industry
1995
2000
Time: Yearly periods
MANU
SERV
2005
CONS
Data Source: LFS : Quarterly: four quarter averages from June 1994 - May 2005
Entrepreneurship and Macroeconomic Factors (cont.)

Unemployment
Interest
Rates
Regional Factors
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Self-employment in the UK
North East
8.30%
Scotland
9.70%
11%
Yorkshire and The Humber
North West
11.40%
West Midlands
11.60%
Wales
11.90%
East Midlands
12.30%
East
13.30%
South East
14.50%
South West
14.70%
London
15.10%
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00

Explaining the variations:
1) Unemployment
16
Self-employment vs. Unemployment in UK Regions
14
London
South West
South East
East
10
12
East Midlands
Wales
West Midlands
North West
Yorkshire and the Humber
Scotland
North East
4
5
6
Unemployment rate: Working age people
SELF
SELF1
Fitted values
Fitted values
Data Source: QLFS: June 2004 - May 2005; four quarter averages
05/11/2010

2) Capital Constraints:
16
Self-employment vs. Average House Prices in UK Regions

London
14
South West
South East
East
12
East Midlands
Wales
West Midlands
North West
10
North East
100000
150000
200000
250000
Average Regional House Prices
SELF
300000
Fitted values
Data Source: QLFS: June 2004 - May 2005; four quarter averages and Land Registry HPI 2006

3) Aggregate Demand
16
Self-employment vs. Gross Annual Pay in UK Regions

London
South West
14
South East
East
10
12
East Midlands
Wales
West Midlands
North West
Scotland
North East
20000
22000
24000
26000
Gross Annual Pay
SELF
28000
30000
Fitted values
Data Source: QLFS: June 2004 - May 2005; four quarter averages and ASHE - workplace analysis 2006
05/11/2010
Summary of Determinants of Entrepreneurship
Explanatory Variable
No. +
No. -
No. 0
Income Differential
Age
36
Labour Market Experience
Education
25
11
14
Married/Working Spouse
20
Ill Health/ Disability
Risk
Self-employed Parent
17
Technological Progress
Unemployment
24
15
Urban Location
Government Benefits
Interest Rate
Personal Wealth
18

The Economics of Self-Employment

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05/11/2010