Does Self-Employment Pay? The Role of Unemployment and Earnings Risk
CESifo, Munich, 2024
CESifo Working Paper No. 11136
![](https://cesifo.org/DocImg/cesifo1_wp11136.jpg?c=1717663538)
This paper documents the role of unemployment and earnings risk in reconciling evidence in payoff differentials between self-employment and paid-employment. Using Spanish administrative data, we characterize the distribution and dynamics of earnings and document lower and less dispersed earnings in self-employment. We consider alternative hypotheses and highlight the role of lower unemployment risk in self-employment. We decompose earnings risk dynamics by estimating a life-cycle earnings process. Indeed, the self-employed experience lower returns but also face lower volatility and persistence of shocks throughout their life-cycle. Our results challenge the conventional view that self-employment necessarily entails higher risk and highlight that accounting for differences in labor earnings risk is important to reconcile the payoff differentials between self-employment and paid-employment.
Labour Markets