Why Become Self-employed? A Microeconomic Analysis of Self-employment in the Australian Labour Market

Author: Darcy Fitzpatrick

Fitzpatrick, Darcy, 2018 Why Become Self-employed? A Microeconomic Analysis of Self-employment in the Australian Labour Market, Flinders University, College of Humanities, Arts and Social Sciences

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In Australia, almost 20% of the workforce is usually self-employed in one form or another. To put this into context, this is more than the number of workers usually unemployed or in the public-sector. However, there exists very little in the way of a theoretical understanding about why people choose to be self-employed rather than work (or search for work) as an employee, or an empirical consensus around the determinants or factors that motivate workers to become self-employed. Self-employment is routinely dismissed or ignored in labour economics research, especially Australian research, and, instead, is most often considered in the economics literature more broadly as a quantitative measure of entrepreneurship. This Thesis attempts to inform the broader purpose of self-employment in the functioning of the labour market and economy in two ways. First, it challenges the prevailing notion of self-employment as a form of entrepreneurship by testing the validity of the explanations derived from the entrepreneurial literature for the appeal of self-employment. Second, it recasts self-employment as a normal part of the labour market equilibrating process, and investigates whether the choice of self-employment is instead better explained by the same economic forces that are thought to cause voluntary job-change more broadly. Central to analysing these contrasting theoretical perspectives is the use of longitudinal data, together with econometric dynamic panel modelling corrected for sources of bias, to capture the causal impact of a worker’s past employment outcomes on the future prospect of them being self-employed. The key finding to emerge is the lack of empirical support for the entrepreneurial explanation of self-employment when compared against the strength of the evidence in support of the alternative labour economics rationale. That is, learning on-the-job and the accumulation of firm-specific human-capital play an important role in determining the choice of self-employment. This is in contrast to much of the prevailing economic understanding of self-employment, and suggests that employees learn and acquire skills and knowhow through their experience on-the-job, which they later transfer to self-employment — a very satisfying genesis or root cause explanation for how people become self-employed.

Keywords: Self-employment, entrepreneurship, HILDA, Australia, panel data model, dynamics, state-dependence, unobserved heterogeneity, labour market, labour economics, econometrics, microeconometrics, labour force, labour market mobility, labour force mobility, occupational choice, job turnover, skills, human capital, job tenure, duration dependence, job matching, duration analysis

Subject: Natl Inst of Labour Studies thesis

Thesis type: Doctor of Philosophy
Completed: 2018
School: College of Humanities, Arts and Social Sciences
Supervisor: Kostas Mavromaras