Friday, July 8, 2011

Self-Employment in the Global Economy

This paper studies the effects of foreign competition on self-employment levels. We begin by pointing out a previously unknown fact: the greater the exposure to foreign competition, the smaller the fraction of self-employed people. This fact holds across very different countries, across relatively similar countries like European Union members, and across industries within the United States. We develop a model where heterogeneous agents select themselves into being either employees or self-employed in the spirit of Lucas (1978). This, in turn, translates into intra-industry firm heterogeneity as in Melitz (2003). Self-employed agents (firms) can also decide to enter into the export markets, subject to fixed and variable trade costs. The model delivers three basic predictions: (1) domestic self-employment increases with the trade costs of exporting from a foreign country to the home country, (2) domestic self-employment increases with the trade costs of exporting to the foreign country, and (3) higher levels of self-employment are associated with a lower fraction of exporting firms. Our empirical work on inter-industry data for the United States confirms these predictions of the model.
The bold was added for my emphasis.

I really need to spend some time and get my head around this one. It seems to say that self employment is less the more foreign competition there is. Which seems to fly against "conventional wisdom". The Boston Federal Reserve Bank published this paper and the full text is available here.

What do you think about this?

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