Microentrepreneurship and the Business Cycle: Is Self-Employment a Desired Outcome?

FRB Atlanta Working Paper 2007-15

41 Pages Posted: 12 Jul 2007

See all articles by Federico Mandelman

Federico Mandelman

Federal Reserve Bank of Atlanta

Gabriel V. Montes Rojas

University of Illinois at Urbana-Champaign

Date Written: July 2007

Abstract

This paper links employment dynamics to the business cycle in order to examine the voluntary nature of self-employment in Argentina. Our results suggest that the transition to self-employment is more common during recessions and that the likelihood of becoming self-employed increases with the length of the recession and the unemployment duration. We find that the majority of self-employed workers do not have employees and earn significantly less than salaried workers. Individuals in this sector are often young and less educated and have trouble obtaining a salaried position regardless of the macroeconomic conditions. Middle-aged, college-educated individuals also tend to enter self-employment as a temporary refuge when they encounter difficulties during a recession. Our results suggest, however, that for entrepreneurs who have employees, entry into self-employment is procyclical and voluntary and has characteristics similar to those predicted for highly skilled risk-taking entrepreneurs. Including idiosyncratic entrepreneurial abilities in a standard job search model allows us to predict such labor market segmentation and the cyclical pattern of entrance into self-employment.

Keywords: microfirms, self-employment, business cycles

JEL Classification: J23, L25, E32

Suggested Citation

Mandelman, Federico and Montes Rojas, Gabriel V., Microentrepreneurship and the Business Cycle: Is Self-Employment a Desired Outcome? (July 2007). FRB Atlanta Working Paper 2007-15, Available at SSRN: https://ssrn.com/abstract=998582 or http://dx.doi.org/10.2139/ssrn.998582

Federico Mandelman (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Gabriel V. Montes Rojas

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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