Predicted earnings and the propensity for self-employment: Evidence from Sweden

Purpose – The purpose of this paper is to investigate the influence of the predicted earnings differential between self-employment and wage-employment on self-employment propensities in Sweden using a large data set from the year 2003. Design/methodology/approach – The analysis in the paper is based on the presumption that the individual chooses to work in either the self-employed or the wage-employed sector. The separate earnings functions for the self-employed and the wage-employed are estimated in order to predict an individual's earnings in each sector. In order to overcome selectivity problems a Heckman approach is used at this stage. Finally, a structural probit model, where the difference in predicted earnings from the two sectors is included as an independent variable, is estimated. Findings – The main result is that the predicted differential between self-employment and wage-employment earnings plays an important role for the self-employment decision and that an increase in this earnings differential will lead to a higher self-employment rate and to an increase in total employment in Sweden. Originality/value – The policy relevance of this question is evident since previous research has shown that self-employed individuals do not only create jobs for themselves but also for others. Thus, an increase in the earnings from self-employment relative to the earnings from wage-employment will increase the self-employment rate as well as total employment.