Shifting Paradigms: The consequences of Misclassifying Employees as Entrepreneurs

Abstract

This paper investigates an unstudied margin of informality: hiring employees as microenterprises to avoid labor costs (employee-subcontracting). In a differences-indifferences design exploring the 2009 introduction of online microenterprise registration in Brazil, I find more registered microenterprises and fewer employment contracts in areas with lower registration costs, consistent with both an increase in microentrepreneurship and employee-subcontracting. To separate both mechanisms and quantify general-equilibrium effects, I introduce a heterogeneous-agent model, which is estimated with Brazilian data. My results indicate that 53% of microentrepreneurs operate as employees, and that, employee-subcontracting acts as a crucial buffer to entrepreunerial risk: when prohibited, microentrepreneurship disappears altogether.

Keywords: MEI, self-employment, employment structure, Misallocation, Productivity, employee-subcontracting, Tax Regime JEL Codes: D22, E26, H26, H32, K34, O17

JEL Classification: D22, E26, H26, H32, K34, O17