Dependent self-employment as a way to evade employment protection legislation

Abstract

This paper examines whether the strictness of employment protection legislation encourages employers to contract out work to their own paid employees by the formula of dependent self-employment, while making transitions to independent self-employment less likely by altering the relative valuation of risk between salaried work and self-employment in favour of the former. In conducting this analysis, discrete choice models are applied to data drawn from the European Community Household Panel from 1994 to 2001. To test the hypotheses, a tentative individual measure of the potential severance payment that a worker would receive in the case of dismissal is included as well as aggregated variables that try to capture differences in labour market institutions and macroeconomic conditions. Evidence for a positive impact of the strictness of employment protection legislation and the potential severance payment on transitions to dependent self-employment is found. The opposite effects, however, are detected for individuals becoming independent self-employed.

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Notes

  1. 1.

    EPL comprises measures designed to protect the rights of employees at work. As defined by the Organisation for Economic Co-operation and Development (OECD), employment protection refers to regulations about hiring (e.g. rules favouring disadvantaged groups, conditions for using temporary or fixed-term contracts, and training requirements) and firing (e.g. redundancy procedures, mandated pre-notification periods and severance payments, special requirements for collective dismissals, and short-time work schemes). EPL, in turn, refers to all types of employment protection measures, whether grounded primarily in legislation, court rulings, collectively bargained conditions of employment or customary practice (Parker 2007).

  2. 2.

    The ECHP data are used with the permission of Eurostat (contract ECHP/2006/09, held with the Universidad de Huelva).

  3. 3.

    Parker (2002) presents an overview of the modern theory and evidence of credit rationing. Parker (2003a) proposes a model of credit markets under asymmetric information in which individuals differ in abilities that are valued in both entrepreneurship and paid employment.

  4. 4.

    See van Stel (2005) for details.

  5. 5.

    See for example, Blau (1987), Parker (1996, 2003b), Robson and Wren (1999), Parker and Robson (2004), Bruce and Schuetze (2004) and Schuetze (2000, 2008).

  6. 6.

    Examples of microeconometric evaluations of start-up subsidies are Meager et al. (2003) for the UK, Perry (2006) for New Zealand, Cueto and Mato (2006) for Spain, Pfeiffer and Reize (2000), Baumgartner and Caliendo (2008) and Caliendo and Kritikos (2009) for Germany and Carling and Richardson (2004) for Sweden.

  7. 7.

    For a review of the few studies that evaluate the effects of ALMP from a macro point of view, see Boone and van Ours (2004).

  8. 8.

    The most extensive issue analysed by empirical studies on this topic has been the effect of unemployment benefit replacement rates on self-employment participation, obtaining a consistent negative impact (e.g. Staber and Bogenhold 1993; Ilmakunnas and Kanniainen 2001; Robson 2003; Parker and Robson 2004; Kanniainen and Vesala 2005; Torrini 2005; Hessels et al. 2007; Robson 2007). In addition, Robson (2007) focusses on the effect of the generosity of old age, disability and death benefits; sickness and health benefits; and unemployment benefits. Finally, attempts to capture the effect of social security contributions of the self-employed are those by Centeno (2000) and Hessels et al. (2007). See Schoukens (1999) for a detailed description of all the European systems.

  9. 9.

    Supiot (2001), Pedersini (2002), Perulli (2003) and Sciarra (2005) provide a European perspective. For international aspects see OECD (2000) and ILO (2003).

  10. 10.

    Approaches to DSE are not homogeneous. By using data from the Australian Bureau of Statistics (Forms of Employment Survey for 2000), Waite and Will (2001) distinguish dependent and independent contractors. The dependent contractors are persons employed on a commercial contract but with work arrangements consistent with their being employees. Böheim and Müehlberger (2009) define DSE as self-employed workers who have no employees and only one customer, using data drawn from the British Labour Force Survey between 1999 and 2005. Finally, Müehlberger and Pasqua (2009) make use of individuals that work on the basis of a contract of continuous and coordinated collaboration by means of data from the Italian Labour Force Survey 2004.

  11. 11.

    Luxembourg and Sweden have to be excluded from our analysis because these countries present missing values in relevant variables.

  12. 12.

    For instance, to identify a transition from paid employment to DSE, we need the following information from the individual: (i) declaring herself as a paid employee in the 1995 survey; (ii) declaring herself as self-employed in the 1996 survey; and (iii) declaring in both surveys, 1995 and 1996, that she started working for her current employer or at the same business in 1995 or before.

  13. 13.

    The cyclical position of the economy can be defined as the difference between actual output and the level of potential output that can be sustained without generating inflationary pressures in the economy. We have obtained similar results by considering harmonised unemployment rates and employment rates (OECD) as alternative measure of macroeconomic conditions. Since the output gap presented lower correlations with variables capturing labour market institutional differences, it was included in our final specifications.

  14. 14.

    For each country, EPL is described using 18 basic items, which can be grouped into three main areas: (i) employment protection of regular workers against individual dismissal; (ii) specific requirements for collective dismissals; and (iii) regulation of temporary forms of employment. For further details on the aggregation of these items, see OECD (1999). More information on the evolution and updating of these indexes is available at OECD (2004).

  15. 15.

    See Appendix B for further details on the construction of this variable.

  16. 16.

    See note 22 for further details on the exclusion of this sector from our analysis.

  17. 17.

    We decided not to include part-time employment in our estimations. This is due to the fact that those individuals doing two jobs at the same time might face short-term problems in one of the two activities, and look for complementary incomes for a certain period of time. That would make the determinants of the transitions of those individuals simultaneously performing both jobs different from the determinants of those who opt for a single activity. We believe, therefore, that part-time self-employment needs to be independently analysed.

  18. 18.

    The labour force status is observed once per year. Thus, if there are additional changes in status within the year, they are missed. It is assumed that there are few of these and that their exclusion does not affect the results.

  19. 19.

    Following usual conventions, we model random individual effects and assume this term as a normally distributed random variable with mean 0 and variance u n and independence from all observable characteristics.

  20. 20.

    The same process has been repeated using a probit and a complementary log–log specification of F(·). These estimations do not alter our empirical conclusions in any significant way.

  21. 21.

    The robustness of our t-statistics has been checked by re-estimating them from variance–covariance matrixes of the coefficients obtained by bootstrapping.

  22. 22.

    Comparing our results with those obtained in the existing literature is a difficult task, plausible only to a certain extent. To the best of our knowledge, only Robson (2003) separately analyses the effects of EPL index for regular and temporary employment. However, Robson’s geographical scope, methods and nature of data, number of observations and even the OECD measures of EPL for regular and temporary contracts (which are not time-dependent) are different from those used in the current study.

  23. 23.

    Within this strategy, a dummy for the agricultural sector and some interactions measuring the effect of institutions for the agricultural sector were included in regressions II and III. These interactions offered some differences in the role of labour market regulation between workers for agriculture and the rest of the economy. However, these results were not robust across both regressions, and we decided to definitively exclude this sector from our analysis.

  24. 24.

    As hypothesis 3 states, the following subsections will reveal that both ISE and DSE are positively affected by the presence of these incentives.

  25. 25.

    We compare our results on social security benefits with those of Robson (2007) since he also breaks the SSLI into its three constituent components. However, unlike in our study, Robson includes the agricultural sector in the analysis.

  26. 26.

    See Carrasco (1999).

  27. 27.

    Similarly to Robson (2007), as an alternative measure of the unemployment benefits system, we included the OECD unemployment benefit replacement rates in some additional estimations, which are available upon request. By so doing, we obtained a negative effect on individuals entering self-employment, as expected given the robustness of this result in the existing literature.

  28. 28.

    It may seem surprising that nearly half of the transitions from paid employment to self-employment are of the DSE kind. However, an individual entering DSE must necessarily switch from paid employment, as the existence of a previous employer is required. Taking this into account as we analyse transitions from paid employment, we are able to identify within our sample all the existing transitions to DSE. By contrast, when we focus on ISE, transitions from paid employment are not the only route, and other entrants from unemployment or out of the labour force (discouraged worker or economically inactive) are not captured.

  29. 29.

    In this sense, specifications II and III report significant results at the 1% level for this variable.

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Acknowledgements

The authors would particularly like to thank the editor, Simon Parker, two anonymous referees and María Rochina for their helpful comments and suggestions. They also thank Jolanda Hessels, Juan Máñez, Juan Sanchis, Roy Thurik, Mirjam van Praag, André van Stel, Ingrid Verheul, Sander Wennekers and participants at an EIM Business and Policy Research Seminar (Zoetermeer, 2008), the ERIM Research Workshop on Institutions and Entrepreneurship (Rotterdam, 2008), the XI World Economy Meeting (Huelva, 2009) and the XII Applied Economics Meeting (Madrid, 2009). This research is part of the project PRY115/09, which has been funded by the Fundación Centro de Estudios Andaluces (5th announcement for research projects grants). The usual disclaimer applies.

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Correspondence to Concepción Román.

Appendices

Appendix A: Data description

See Tables 5, 6, 7.

Table 5 Description of variables
Table 6 Distribution of observations across countries
Table 7 Descriptive statistics of the transitions from paid employment to self-employment

Appendix B: Description of individual potential severance payment

This variable is a person- and time-variant measure of the potential severance payment that the worker would receive in case of dismissal. In particular, following the OECD (1999), the variable is defined as severance pay for individual dismissal of a regular employee with tenure beyond any trial period, dismissed on personal grounds or economic redundancy, but without fault. Information is mainly based on legal regulations, but also, where relevant, on averages found in collective agreements or individual employment contracts. For its construction, information on employment duration, salary, type of contract and age (if necessary) is taken into account. The information considered in calculations is summarised by country in Table 8.

Table 8 Construction of the individual severance payment by country

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Román, C., Congregado, E. & Millán, J.M. Dependent self-employment as a way to evade employment protection legislation. Small Bus Econ 37, 363–392 (2011). https://doi.org/10.1007/s11187-009-9241-3

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Keywords

  • Entrepreneurship
  • Self-employment
  • Dependency
  • Contracting out
  • Occupational choice
  • Labour market institutions

JEL Classifications

  • J24
  • J38
  • J65
  • K31
  • L24
  • L26