The self-employed constitute a large proportion of the workforce in developing
countries and recent large-scale household data have confirmed an
increase in self-employment both in rural but especially urban contexts. In
econonmics, self-employment is interpreted as entrepreneurship, i.e. the establishment
of a business transforming capital and labour into output. However,
in developing countries many self-employed operate with little to no
capital. Self-employment may then be thought to be a last resort in absence
of jobs and unemployment benefits. Just like welfare implications of unemployment
depend on whether this state is voluntary or involuntary, so also
the increase in self-employment observed across West Africa should be evaluated
in terms of whether self-employment is voluntary or not.
This article attempts to shed some light on the fraction of self-employed
that can be considered “choice self-employed” contrasting to “necessity selfemployed”.
We present a simple model of a two-sector labour market and
estimate earnings using a correlated random coefficients model that allows
us to calculate counterfactual earnings even if sector choice is constrained by
barriers to entry