Gross Labor Market Flows, Self-Employment, and Unemployment Insurance

Abstract

In this paper, we examine the effects of relative risk across occupations on the dynamics of the employment, unemployment, and self-employment rates. Using variations in unemployment insurance (UI) generosity as a means of altering relative risk, we analyze the complete set of gross labor market transitions. We empirically establish a negative and significant relation between UI generosity and the propensity for eligible unemployed individuals to select into self-employment. The general equilibrium model we then introduce generates empirically consistent gross flow elasticities. The model predicts that differences in insurance coverage between occupations are a crucial factor influencing the responsiveness of gross flows, in addition to the effects of moral hazard and liquidity. Furthermore, the model illustrates how, consistent with empirical evidence, reallocations from self-employment to employment are a key factor in generating a stable to slightly increasing employment rate as UI generosity increases.

Keywords: Self-employment, Entrepreneurship, Occupational Choice, Labor Market Mobility, Unemployment Insurance.

JEL Classification: E24, E61, J62