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What Drives Self-Employment Survival for Women and Men? Evidence from Canada

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Abstract

This paper investigates the determinants of self-employment survival among women and men using the Canadian Survey of Labour and Income Dynamics. Survival is analyzed in the context of a single outcome (exiting self-employment) and in the context of multiple outcomes or competing risks (i.e. self-employment exit due to failure, versus non-failure exits). The largest detriment to survival for women is number of children. Whereas children improve survival rates for men. Non-participation in the labor force prior to starting a self-employment spell increases the probability of failure for women, but not men. Consistent with the liquidity constraint hypothesis, women who have personal wealth are less likely to exit self-employment. For women, this wealth effect does not depend on exit type. However, for men, the availability of personal wealth reduces the probability of exiting self-employment due to failure, but increases the probability of non-failure exits.

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Notes

  1. During the 1980s approximately 30 percent of self-employed were women. Author’s calculations using the Canadian Labour Force Survey.

  2. Lin et al. (2000) report separate ln(exit rate) of 3.178 for female and 2.936 for male self-employed.

  3. Several studies, in Canada and abroad, suggest that personal and business characteristics can explain most of this gender gap (e.g., Fabowale et al. 1995; Haines et al. 1999; Coleman 2000; and Blanchflower et al. 2003). However, there are two reasons to question the validity of these findings. First, the majority of these studies use survey data composed of business owners only. Such data cannot account for differences in rejection rates among individuals who applied for loans, but ended up not starting a business. Studies which use proprietary bank data, like Haines et al. (1999), may still be biased because, as Blanchflower et al. (2003) suggest, loan rejection gaps will be underestimated if minority (female) application rates are low from fear of rejection. As an example, Coleman (2000) finds that only 35 percent of female business owners applied for external funding, versus 45 percent of men. Evans and Jovanovic (1989) suggest that binding liquidity constraints can inhibit both entry and success in self-employment. Thus, poorer access to capital may be behind at least some of the gender differences in self-employment exit rates. Indeed, Fairlie and Robb, 2009 find that lower amounts of start-up capital among women can account for over 40 percent of the gender gap in business closure rates in the United States.

  4. The regions are Eastern, Ontario, Quebec, Prairies, and BC. Ontario is omitted.

  5. 5 One benefit of the panel data is that the values of explanatory variables can be taken from the year prior to a spell start, mitigating the issue of endogenous personal characteristics. If these values were taken during the spell and an exit probit performed, then business success could be determining both the characteristics and exit probability.

  6. I gratefully acknowledge the use of Jenkins (2006, 2008) code, hshaz and pgmhaz, and supporting documentation, to estimate the discrete models.

  7. Hurst and Lusardi (2004) find that the lowest quantile of low capital industries start with an average of $3,155. This information is derived from the National Survey of Small Business Finances (1987) and is converted to 1996 U.S. dollars. The equivalent amount in Canadian dollars is in the range of $4,264.

  8. There are several different methods by which the literature measures liquidity constraints. Consistent with the literature I apply the term liquidity loosely as any measure of funds from which the individual may draw to start a business. Although liquidity and wealth are used interchangeably, it should also be noted that wealth measures are not entirely liquid. Wealth includes housing assets, which may be used as collateral, or sold for funds, but are not necessarily a preferred method for generating start-up capital. Moreover, liquidity and liquidity constraints have slightly different meanings. While ownership of liquidity implies the absence of constraints, a proxy for constraints need not be a quantitative measure of liquidity. For example, an alternative proxy for the presence of liquidity could be an indicator for withdrawal of retirement savings.

  9. However, Fairlie (1999), analyzing self-employment entry across race, interprets the larger positive coefficient estimate for blacks (relative to whites) as indicative that credit market discrimination may exist.

  10. However, the characteristics associated with a particular job, are the characteristics of the person in the year prior to the start of this specific job.

  11. I classify jobs by the respondents self-report; however, some self-employment may be less serious than others. Some entrepreneurs have multiple jobs, and have businesses lasting less than one month. Short spells cannot be distinguished as failures or planned contract work. As such, I do not pre-condition my measure of self-employment status on duration or success. This definition is similar, in spirit, to that of Hurst and Lusardi (2004).

  12. The majority of unknown ends occur at the termination of the Panel. However, 16–18 percent are truly unknown. Such ends may occur if subsequent interviewees deny the existence of a job (for example, a proxy respondent may not be aware of a job spell).

  13. The Kaplan-Meier curve, survivor function, shows the conditional probability of an agent surviving time t, given that they reach time t.

  14. Prior to inference using proportional hazard estimates, one should first confirm that the impact of characteristics is indeed constant (proportional). Two tests are run to consider the proportionality of the investment variable: plotting the observed against the predicted hazard, and plotting the -ln(-ln(survival)) curves at each value of the investment income 200 + flag. Adjusting for other covariates, both tests indicates that the proportional hazards is not violated.

  15. The benefits to more restrictive samples is that interpretation is cleaner on a more homogeneous sample. The drawback to restricted samples, and novel proxies for liquidity constraints as well, is that the samples can become quite small. In some cases, the sample may be too small to obtain precise estimates and the external validity of the results on small samples is questionable.

  16. Because there is no reason to suppose that the amount of capital necessary to propel a person to become self-employed is the same amount of capital that would enable them to survive, I also test a lower cut off of $100 in investment income. Hazard ratios are similar: larger than 1 for men, smaller than 1 for women, and both insignificant. Although the cell sizes are limited, I further test the non-linearity effect of liquidity on duration by using a series of investment income indicator variables. For the full sample, all categories are insignificant for men, while women have significant coefficients at 200–299 and over 5000. However, when missing values are dropped, the lower ranges 100, 200(peak for women) and 400 become more significant, and 5000 much less so.

  17. Jenkins’ (2006) Hshaz and (2008) pgmhaz are used for the Heckman-Singer approach and for the discrete proportional hazards (Prentice-Gloeckler) model. Alternative specifications and starting values for two mass points are considered in the Heckman-Singer approach. Note that a reduced covariate list and a more aggregated baseline hazard (measured in one year intervals, merged for years 5 and 6) were necessary in order to estimate duration dependence as well as unobserved heterogeneity.

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  1. Department of Economics, University of Waterloo, Waterloo, ON, N2L 3G1, Canada

    Kate Rybczynski

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Correspondence to Kate Rybczynski.

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The research and analysis in this paper are based on data from Statistics Canada. The opinions expressed herein do not represent the views of Statistics Canada.

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Rybczynski, K. What Drives Self-Employment Survival for Women and Men? Evidence from Canada. J Labor Res 36, 27–43 (2015). https://doi.org/10.1007/s12122-014-9194-4

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