Central Data Catalog

Citation Information

Type Thesis or Dissertation - PhD Dissertation
Title Self Employment in Developing Countries: a Search-Equilibrium Approach
Author(s)
Publication (Day/Month/Year) 2011
URL http://aida.wss.yale.edu/conference/neudc11/papers/paper_011.pdf
Abstract
In Latin America, self employment comprises more than thirty percent of the workforce, and the majority of firms. In Brazil, most of the self employed evade payroll taxes and have low education. They are found in small scale businesses which require low skills, thus are unlikely to expand and employ other workers. More importantly, self employment rates in such countries show a steep rise with individuals’ age. All these facts suggest that most of the self employed in developing countries are merely workers who seem to learn with age about good business opportunities they want to undertake. I develop and estimate a life cycle search model of the labour market to understand individuals’ employment choices. Workers can be wage earners in the formal or informal sectors, or self employed. Firms are ex-ante heterogeneous, and are formal or informal. In the formal sector, they pay payroll and severance tax. In the informal sector, they can be fined. The model thus characterises the environment in developing countries where these aspects of employment are important and the institutional background is similar. Through the modelling of entry into self employment, which depends on potential work experience, I find that the model reproduces well the composition of workers over the life cycle as observed in Brazilian data. The estimated model is used to examine counter factual policies. I analyse the welfare implications of policies which attempt reducing informality. In particurlar, I look at the impact of changes in the cost of informality on unemployment, welfare, composition of workforce, and wage inequality.

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