Individual and place-based drivers of self-employment in Chile

Abstract

This paper analyzes the importance of individual and place characteristics on the selection into self-employment in Chile. Following a structural and multilevel empirical approach, we test whether both sets of variables explain the variation of individual wages, self-employed earnings, and the propensity of being in independent work. The results indicate that while most of the variation in these three outcomes is explained by individuals’ traits, place-related variables account for a non-negligible share of spatial variation. Second, as suggested by occupational choice theories, the propensity of being in self-employment positively correlates with larger expected earning differentials, but only in the case of employers. This, along with other results, suggests that while employers seem to choose their occupational status, own accounts in Chile seem to respond to factors pushing them into self-employment.

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Notes

  1. 1.

    We are grateful to two anonymous reviewers for several comments about the importance of non-pecuniary motivations on the propensity to be in self-employment, which motivated a generalization of the utility functions and therefore of the empirical model.

  2. 2.

    The specific variable in CASEN (YOPRAJ) includes expenses such as discounts due to loan payments, labor union membership fees, or voluntary contributions to pension funds. On the contrary, it excludes legal discounts for social security, pension funds, and income taxes and also excludes exceptional bonuses and other allowances.

  3. 3.

    We also used the more theoretically-grounded Market Potential Function by Hanson (2005). Results did not change in any meaningful way.

  4. 4.

    As suggested by an SBE reviewer, we fitted models including interaction terms between the gender variable and the other regressors, in order to capture gender differences in marginal returns. The results indicate that the rate of return of schooling (and mean municipal schooling) is larger for women in salaried work, whereas the opposite is true for the apparent experience variable. The results are available upon request.

  5. 5.

    We also fitted the model with the Hanson’s (2005) NEG market potential function and the results are virtually the same.

  6. 6.

    The model including gender interaction terms indicated that the marginal rate of return of individual schooling and apparent experience is lower for women in self-employment, but the coefficient for municipal average schooling is not significant. Results available upon request.

  7. 7.

    We thank an anonymous reviewer for making this observation.

  8. 8.

    An LR test based on the estimation of a random-slope multilevel model rejects a uniform coefficient for this variable across Chilean comunas (chi2 with 1 d.f. = 12.13). The coefficients of the random slope model are very similar to those reported in column (3) of Table 3. The complete output is available upon request. We thank an anonymous reviewer for suggesting a formal test of a spatially varying effect of this variable.

  9. 9.

    The estimated coefficient is, in this case, very close to zero (0.007) and highly not significant (p value = 0.743; output available upon request). Moreover, it is contained in the 95% confidence interval of the parameter in Table 3 (−0.627; 0.075). We thank an anonymous reviewer for suggesting this robustness check.

  10. 10.

    A model including interactions of the gender dummy with the other regressors indicate that the coefficient for the apparent experience variable is larger for women, whereas it is smaller for the variable of specific experience. The results are not reported but are available upon request.

  11. 11.

    This illustration was included following the suggestion by a reviewer to whom we are grateful.

  12. 12.

    The LR test based on the random slope model was unable to reject the hypothesis of a constant coefficient for the predicted earning differential across space in the case of employers (chi2 with 1 d.f. = 1.49) but rejects it for the own-account self-employed (chi2 with 1 d.f. = 5.97). The outputs are available upon request.

  13. 13.

    In this case, the coefficient for the alternative earnings differential is 1.45 (p value < 0.001) for employers and −0.140 (p value < 0.001) for own-accounts. In both cases, the coefficient for the alternative earning differentials is contained in the 95% confidence interval of the coefficient in Table 6 ([0.153; 1.733] for employers and [−0.706; −0.060] for own-accounts). Outputs available upon request.

  14. 14.

    For a discussion on these alternative theories, see Packard (2007).

  15. 15.

    These limitations of the empirical analysis were remarked by an anonymous reviewer to whom we are grateful.

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Acknowledgments

The authors want to thank SBEJ Associate Editor, Dr. Michael Fritsch, two anonymous reviewers, Miguel Atienza, and participants at the PRSCO conference 2015 for their helpful comments and suggestions. Juan Alberto Palomino provided excellent research assistance. The usual disclaimer applies. The National Commission of Scientific and Technological Research of Chile (CONICYT) supported this work under grant [FONDECYT 1130356].

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Correspondence to Félix Modrego.

Appendix

Appendix

Table 8 Variable definitions and measurement issues

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Modrego, F., Paredes, D. & Romaní, G. Individual and place-based drivers of self-employment in Chile. Small Bus Econ 49, 469–492 (2017). https://doi.org/10.1007/s11187-017-9841-2

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Keywords

  • Self-employment
  • Occupational choice
  • Human capital
  • Location theories

JEL classifications

  • J24
  • J31
  • L26
  • R11