Wage employment, unemployment and self-employment across ... · Introduction The distribution of...
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Wage employment, unemployment andself-employment across countries
Markus Poschke
McGill University
SEA 2018Washington, DC, November 19, 2018
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Introduction
The distribution of employment status across countries
This paper1. documents relationships between self-employment,
unemployment and income per capita2. develops a model for labor markets with a lot of self-employment3. quantitatively studies determinants of self-employment and
unemployment.
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Introduction
The distribution of employment status across countries
This paper1. documents relationships between self-employment,
unemployment and income per capita1.1 Higher self-employment in poorer countries.
A lot of this is low-productivity own-account work.1.2 Higher unemployment relative to wage employment (“UN ratio”)
in poorer countries.1.3 Higher self-employment where UN ratio is high.
2. develops a model for labor markets with a lot of self-employment3. quantitatively studies determinants of self-employment and
unemployment.
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Introduction
The distribution of employment status across countries
This paper1. documents relationships between self-employment,
unemployment and income per capita1.1 Higher self-employment in poorer countries.
A lot of this is low-productivity own-account work.1.2 Higher unemployment relative to wage employment (“UN ratio”)
in poorer countries.1.3 Higher self-employment where UN ratio is high.
2. develops a model for labor markets with a lot of self-employment3. quantitatively studies determinants of self-employment and
unemployment.Labor market frictions3.1 can account for a very large fraction of the variation in not only
unemployment but also self-employment across countries, and3.2 affect aggregate output via the quality of own-account workers.
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Empirical patterns
Self-employment, unemployment and income per capita:Evidence from 150 censuses
− IPUMS International provides harmonized census data for 60+countries
− covers 1960-2011− Censuses typically about 10 years apart− allows computing unemployment, employment and
self-employment by urban/rural, education, age...− sample used: urban, age over 16, country population > 1M⇒ main sample: 137 censuses from 55 countries− comparability code (3 tiers)
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Empirical patterns
The classification of employment status
EMPSTAT:− Inactive− Unemployed− Employed
CLASSWK:◦ Self-employed
I Own-account workerI Employer
◦ Wage/salary worker (employee)◦ Unpaid◦ Other
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Empirical patterns
The classification of employment status
EMPSTAT:− Inactive− Unemployed− Employed
CLASSWK:◦ Self-employed
I Own-account workerI Employer
◦ Wage/salary worker (employee)◦ Unpaid◦ Other
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Empirical patterns
Labor force composition and GDP per capita
self-employed
wage/salaryworkers
0
.2
.4
.6
.8
1
cum
ulat
ive
fract
ion
of th
e la
bor f
orce
7 8 9 10 11log GDP per capita
unemployed plus wage/salary workers plus self-employed
Data: IPUMS International, 196 observations, 64 countries, urban areas, 1960-2011.PWT. non-urban
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Empirical patterns
Labor force composition and GDP per capita
self- fraction fraction fractionemployment own-account employers wage/salary
rate workers workers
ln(Y/L) -0.132∗∗∗ -0.143∗∗∗ 0.012∗∗∗ 0.138∗∗∗
(0.017) (0.020) (0.003) (0.017)
R2 0.507 0.512 0.236 0.543observations 150 140 140 150countries 58 53 53 58
Notes: Data on urban areas. Standard errors in parentheses. Between effectsregressions. ∗, ∗∗ and ∗∗∗ indicate statistical significance at the 10%, 5% and 1% levels,respectively.
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Empirical patterns
The distribution of employment status across countries
Every time GDP per capita doubles,− the self-employment rate declines by 9 percentage points,− the wage employment rate increases by 9 percentage points.
Robust:− similar for entire country− for only top tier data
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Empirical patterns
The distribution of employment status across countries
Every time GDP per capita doubles,− the self-employment rate declines by 9 percentage points,− the wage employment rate increases by 9 percentage points.
Robust:− similar for entire country− for only top tier data
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Empirical patterns
Unemployment and GDP per capita
0
.2
.4
.6
unem
ploy
men
t: di
ffere
nt m
easu
res
7 8 9 10log GDP per capita
denominator: labor forceFitted values
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coeff.: 0.003 (0.009)R2: 0.002, N: 165
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Empirical patterns
Measuring unemployment
u =UL
=U
U + N + SE
Data:− U/L similar across countries.− Rich countries: high N, low SE− Poor countries: high SE, low N
⇒ unemployment/employment (UN) ratioU
U + Nhigh in poor
countries.Measures incidence of failed search.
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Empirical patterns
Measuring unemployment
u =UL
=U
U + N + SE
Data:− U/L similar across countries.− Rich countries: high N, low SE− Poor countries: high SE, low N
⇒ unemployment/employment (UN) ratioU
U + Nhigh in poor
countries.Measures incidence of failed search.
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Empirical patterns
Measuring unemployment
u =UL
=U
U + N + SE
Data:− U/L similar across countries.− Rich countries: high N, low SE− Poor countries: high SE, low N
⇒ unemployment/employment (UN) ratioU
U + Nhigh in poor
countries.Measures incidence of failed search.
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Empirical patterns
The UN ratio and GDP per capita
0
.2
.4
.6
unem
ploy
men
t: di
ffere
nt m
easu
res
7 8 9 10log GDP per capita
denominator: labor force minus unpaid minus SEFitted values Fitted values Fitted values
Notes: Data for urban areas.Markus Poschke (McGill) Wage employment, unemployment and self-employment 10
coeff.: −0.035 (0.014)R2: 0.10, N: 150
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Empirical patterns
The distribution of employment status across countries
Every time GDP per capita doubles,− the self-employment rate declines by 9 percentage points,− the wage employment rate increases by 9 percentage points,− the UN ratio decreases by 2.5 percentage points.
Robust:− similar for entire country− for only top tier data− within age groups
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Empirical patterns
The distribution of employment status across countries
Every time GDP per capita doubles,− the self-employment rate declines by 9 percentage points,− the wage employment rate increases by 9 percentage points,− the UN ratio decreases by 2.5 percentage points.
Robust:− similar for entire country− for only top tier data− within age groups
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Empirical patterns
Self-employment and unemployment
ARG
BFA
BGD
BLR
BOL
BRA
CAN
CHL
COL
CRI
DOM
ECU
EGY ESP
ETH
FRA
GHAGIN
HUN
IDNIND
IRL
IRN
IRQ
ISR
JAM
JORKGZ
KHM
MEX
MLI
MWI
MYS
NGA
NIC
PAK
PAN
PER
PRT
PRY
PSE
ROU
RWA
SDN
SEN
SLV
SSD
TZA
UGA
URY
USA
VEN
VNM
ZMB
0
.2
.4
.6
.8
self-
empl
oym
ent r
ate
0 .1 .2 .3UN ratio
Data: IPUMS International, data for urban areas, 135 observations, 54 countries,1960-2011, bottom 90% of UN. PWT. Appendix
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coeff.: 0.79 (0.32)R2: 0.105, N: 54
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Empirical patterns
Self-employment and unemployment, controlling for income
dependent self-employment fraction own- fractionvariable: rate account workers employers
UN ratio 0.702∗∗ 0.802∗∗ 0.058(0.285) (0.312) (0.051)
log GDP per capita -0.122∗∗∗ -0.136∗∗∗ 0.012∗∗∗
(0.018) (0.020) (0.003)
R2 0.556 0.575 0.229observations 136 126 126countries 54 48 48
Notes: Standard errors in parentheses. Between effects regressions. Bottom 90% ofUN. ∗, ∗∗ and ∗∗∗ indicate statistical significance at the 10%, 5% and 1% levels,respectively.
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Empirical patterns
The distribution of employment status across countries
Every time GDP per capita doubles,1. the self-employment rate declines by 9 percentage points,2. the wage employment rate increases by 9 percentage points,3. the UN ratio decreases by 2.5 percentage points.
4. Self-employment rate rises by 0.5 percentage points as U/(U + N)rises by 1 percentage point (at fixed GDP per capita).
Robustness:− similar estimate for only top tier data− 1.-3. also hold for entire country, 4. only significant in urban data⇒ the SE-UN relationship is an urban phenomenon
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Empirical patterns
The distribution of employment status across countries
Every time GDP per capita doubles,1. the self-employment rate declines by 9 percentage points,2. the wage employment rate increases by 9 percentage points,3. the UN ratio decreases by 2.5 percentage points.
4. Self-employment rate rises by 0.5 percentage points as U/(U + N)rises by 1 percentage point (at fixed GDP per capita).
Robustness:− similar estimate for only top tier data− 1.-3. also hold for entire country, 4. only significant in urban data⇒ the SE-UN relationship is an urban phenomenon
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Model
Model
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Model
Main model ingredients
− Builds upon Diamond-Mortensen-Pissarides.− 4 states: employed, unemployed, self-employed, employer.− The unemployed choose whether to
◦ search for a job, or◦ start a firm, at a cost.⇒ endogenous firm entry rate.
− Firms differ in productivity z.− z is revealed after entry. Once known, two options:
◦ Become an employer, post vacancies to hire workers: y = znγ.◦ Become an own-account worker: y = ζz.⇒ endogenous own-account/employer split.
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Model
Equilibrium
Equilibrium θ, w pinned down by occupational choice and wagebargaining.− OC curve:
Value of search = value of entry: downward-sloping in θ, w-space.− wage curve: upward-sloping in θ, w-space.
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Quantitative Results
Quantitative Results
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Quantitative Results
Quantitative exercises
1. Calibrate the model to eight countries spanning the distribution ofincome
2. Which factors drive cross-country differences?3. The effect of labor market frictions
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Quantitative Results
Calibration strategy: targets
parameter target
kv vacancy posting cost unemployment outflow rateA matching fct. prodty normalizationξ match destruction rate unemployment rate
kf entry cost self-employment rateζ rel. SE productivity fraction own-accountλf firm exit rate firm exit rateσz productivity variance share employment large firms
δ probability casual work rate of casual employmentη worker bargaining power labor income shareb u flow value b/w = 0.4
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Quantitative Results
Calibration: target countries
u outflow own-accountu (%) rate (%) workers (%)
Ethiopia 23.7 4.4 28.8Indonesia 5.8 9.1 31.1Mexico 4.2 39.8 22.1Italy 15.2 6.2 15.7France 13.0 8.6 4.0Germany 10.7 6.2 4.6Canada 6.9 25.6 6.9US 5.1 44.0 4.9
average 10.6 18.0 14.9
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Quantitative Results
Calibrated parameters: some highlights
Ethiopia USA average
Model moments:
Unemployment outflow rate 0.044 0.453 0.180Unemployment rate 0.237 0.051 0.106
Self-employment rate 0.348 0.098 0.193Fraction own-account workers 0.288 0.050 0.149Share of employment firms with n > 10 0.089 0.848 0.740
Parameter values:
Vacancy posting cost kv 69 12 45.4Job destruction rate ξ (%) 3.2 1.36 1.43
Firm entry cost kf 13.54 56 7.5Relative own-account productivity ζ 0.519 0.657 0.605Productivity dispersion σz 0.0224 0.164 0.32
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Quantitative Results
What accounts for model fit?
Calibration: choose value for 8 parameters per country to match 8targets.
Which parameters matter for capturing cross-country variation?Approach:− Benchmark: calibration outcomes for each country using
parameters from average country calibration.− Then allow 1, 2 or 3 parameters to be country-specific, to achieve
best calibration fit in each country.− Measure
◦ decline in the calibration loss function (total across countries)◦ decline in sum of squared deviation between model outcomes and
data for u, UN, SE
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Quantitative Results
Labor market frictions central for explaining variation
Overall unemployment u UN SEfit outflow rate ratio rate
One country-specific parameter:kf 0.173 0.099 -0.075 0.143 0.701kv 0.438 0.715 0.306 0.370 0.105η 0.118 0.209 0.213 0.117 -0.141b 0.124 0.167 0.003 -0.013 0.224ξ 0.190 0.021 0.284 0.413 0.883ζ 0.138 -0.017 -0.113 0.003 0.915
Two country-specific parameters:kv, ξ 0.708 0.939 0.191 0.336 0.808
Three country-specific parameters:kv, b, ξ 0.915 0.987 0.984 0.988 0.890
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Quantitative Results
Labor market frictions central for explaining variation
Overall unemployment u UN SEfit outflow rate ratio rate
One country-specific parameter:kf 0.173 0.099 -0.075 0.143 0.701kv 0.438 0.715 0.306 0.370 0.105η 0.118 0.209 0.213 0.117 -0.141b 0.124 0.167 0.003 -0.013 0.224ξ 0.190 0.021 0.284 0.413 0.883ζ 0.138 -0.017 -0.113 0.003 0.915
Two country-specific parameters:kv, ξ 0.708 0.939 0.191 0.336 0.808
Three country-specific parameters:kv, b, ξ 0.915 0.987 0.984 0.988 0.890
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Quantitative Results
Can the model account for theself-employment/unemployment relationship?
0
.2
.4
.6
.8
self-
empl
oym
ent r
ate
0 .1 .2 .3UN ratio
Data: calibration countries other countries linear fitModel: 2 specific parameters linear fit
3 specific parameters linear fit
Parameters from the average economy calibration, except kv and ξ (2 parameters),plus b (3 parameters)
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data coeff.: 0.79model coeff.:
0.88 (2 par.s)0.37 (3 par.s)
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Quantitative Results
Summary of decomposition
1. Variation in labor market parameters (kv, ξ, b) across countries iskey for◦ overall fit◦ variation in unemployment◦ variation in self-employment◦ joint variation in unemployment and self-employment.
2. Other parameters (kf , ζ) fit variation in self-employment, but havecounterfactual implications for unemployment.
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Quantitative Results
The effect of labor market frictions
Illustrate their effect on− labor market outcomes− output
for different settings.
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Quantitative Results
The effect of varying labor market frictions on unemploymentand self-employment
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5
0
0.1
0.2
0.3
0.4
0.5
0.6
(a) Low kf (from average countrycalibration): kv mostly affects SE
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5
0
0.1
0.2
0.3
0.4
0.5
0.6
(b) High kf (from US calibration): kvmostly affects UN
Self-employment is an important margin for “escaping” frictions.
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Quantitative Results
The effect of labor market frictions on output
Experiment: reduce kv by half.
calibration to
average avg economy, Ethiopia US% change in economy high kf
output:aggregate output 4.0 5.2 6.1 1.4
counterfactual output:only u changes 2.9 5.1 0.6 1.7only SE rate changes 1.2 0.0 5.2 -0.4
− High kf : labor market frictions mostly affect output via u.− Low kf : kv affects output via occupational choice and the quality
of entrepreneurs.
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Quantitative Results
Conclusion
1. Poor countries feature high unemployment and highself-employment.
2. An extended DMP model can serve to model poor country labormarkets with high u and SE.
3. The model suggests that cross-country differences in labormarket frictions are the source not only for differences inunemployment, but also in self-employment.
4. Labor market frictions◦ strongly increase self-employment, and◦ can reduce output by encouraging low-productivity own-account
work.
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Quantitative Results
Challenges and future directions
− Worker and match heterogeneity⇒ requires a decent-sized urban panel− Entry investment choice, frictions at entry− Life cycle
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Appendix
Appendix
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Appendix
Labor force composition and GDP per capita – countrywide
self-employed
unpaid wage/salaryworkers
0
.2
.4
.6
.8
1
cum
ulat
ive
fract
ion
of th
e la
bor f
orce
7 8 9 10 11log GDP per capita
unemployed plus wage/salary workers plus unpaid plus self-employed
Data: IPUMS International, 214 observations, 68 countries, 1960-2011. PWT. back
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Appendix
Labor force composition and GDP per capita – urban, incl.unpaid
self-employed
unpaid wage/salaryworkers
0
.2
.4
.6
.8
1
cum
ulat
ive
fract
ion
of th
e la
bor f
orce
7 8 9 10 11log GDP per capita
unemployed plus wage/salary workers plus unpaid plus self-employed
Data: IPUMS International, 42 countries, 1960-2011. PWT. backMarkus Poschke (McGill) Wage employment, unemployment and self-employment 34
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Appendix
Self-employment and unemployment
ARG
ARM
BFA
BGD
BLR
BOL
BRA
CAN
CHL
CMR
COL
CRIDOM
ECU
EGY ESP
ETH
FRA
GHAGIN
HTI
HUN
IDNIND
IRL
IRN
IRQ
ISR
JAM
JORKGZ
KHM
LBR
MEX
MLI
MWI
MYS
NGA
NIC
PAK
PAN
PER
PRT
PRY
PSE
ROU
RWA
SDN
SEN
SLV
SSD
TZA
UGA
URY
USA
VEN
VNM
ZAF
ZMB
0
.2
.4
.6
.8
self-
empl
oym
ent r
ate
0 .2 .4 .6U/(U+N)
Data: IPUMS International, 59 countries, 1960-2011. PWT. back
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Appendix
Are self-employment and unemployment mutually exclusive?
− UEUS data: average weekly hours worked are 50 for SE, 1.3 forthe unemployed.
− Donovan et al. (2018): SE→N transition rate flat in GDP percapita.
− Abebe et al. (2016) survey: Rare for job seekers to engage inself-employment.
− Franklin (2014): Job search is time consuming and costly. Oftenrequires physical travel to read job ads and drop off applications.
− How is job search financed? With casual work. Readily available;does not require capital.Censuses capture casual work as a separate category.
Markus Poschke (McGill) Wage employment, unemployment and self-employment 36