The dynamic role of specific experience in the selection of self-employment versus wage employment

Available from: 
October 2013
Paper author(s): 
Cristian Pardo (Saint Joseph's University)
Jaime Ruiz-Tagley (Universidad de Chile)

This paper examines the question of what drives an individual in a developing country to choose self-employment over a more traditional wage-earning job, or vice-versa. Differences in expected earnings, income variability and other aspects like the levels of independence and job satisfaction, may affect this choice. This type of decision-making is inherently dynamic as choices affect the accumulation of labor experience specific to either sector over time, and thus it impacts the worker's current and future well-being. This paper models an individual's decision over employment type by estimating a stochastic, discrete choice, dynamic optimization problem using panel data from Chile's Social Security Survey. Using the estimated structural parameters of the optimization problem, we conduct multiple simulation exercises of employment type choice under the hypothetical scenario of a mandatory universal unemployment insurance scheme that is set to be implemented in Chile in 2015 (currently, this system is compulsory only for wage-earning workers). Results suggest that such a reform would increase the overall number of workers choosing self-employment by about 3 percent. In addition, consistent with theories of accumulation of specific experience and specialization, we observe that the expected impact of the reform on choices falls for older and more experienced individuals.


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Research section: 
Lacea 2013 annual meeting
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