The Ins and Outs of Self-Employment: An Estimate of Business Cycle and Trend Effects

We examine quarterly microlevel data on labor market transitions taken from the Current Population Survey from 1990 to 2014 to estimate how the business cycle affects transitions into and out of self-employment from other labor market states. We control for individual demographics and occupational influences in our analysis to better pinpoint the effect of demand growth on these transitions. We find that changes in demand conditions substantially influence the marginal rate of transition into and out of self-employment from other labor market states, after taking into account demographic and industrial differences. A contraction in demand has a large effect on self-employment because it alters the balance between self-employment entry and exit. Falling demand leads to an increase in exit from entrepreneurship, but has countervailing effects on entry. While a decrease in demand leads to a decrease in the opportunity cost of entry into entrepreneurship by increasing the rate of unemployment, the entry into entrepreneurship is higher from employment than from unemployment or from out of the labor market. Finally, we find that the effect of changes in demand on self-employment differ for incorporated and unincorporated self-employment.