Logit Analysis in a Rotating Panel Context and an Application to Self-Employment Decisions
23 Pages Posted: 20 Apr 2016
Date Written: July 21,1998
Does the timing of the transition into informal self-employment follow a life-cycle pattern where credit-constrained workers first accumulate capital in the formal sector? Or does self-employment correspond better to a traditional safety-net for the unemployed? Gonzalez and Maloney derive a methodology for analyzing logit models in a rotating panel context. They then apply the technique to test two theories of why and when salaried workers enter the informal self-employed sector. In the traditional view, workers fired from formal jobs queue in the informal sector to reenter the formal sector. Gonzalez and Maloney argue that for many, self-employment is a desirable goal, but that credit constraints often dictate that they work in the formal sector until enough start-up capital is accumulated.
They model the decision to move as a stopped Markov process in which, in each period, the worker compares accumulated savings with the target level for switching sectors dictated by the forecasted stream of discounted utility arising from employing labor and capital in each sector. They test and find support for the model using the new logit methodology and rotating panel data from Mexico.
This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Latin America and Caribbean Region - is part of a larger effort in the region to understand the functioning of developing country labor markets.
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