Skip to main content

Advertisement

SpringerLink
Log in

Self-employment as a source of income inequality

  • Regular Article
  • Published:
Eurasian Business Review Aims and scope Submit manuscript

Abstract

It is well known that the self-employed are over-represented at the bottom as well as the top of the income distribution. This paper shifts the focus from the income situation of the self-employed to the distributive effects of a change in self-employment rates. With representative German data and unconditional quantile regression analysis we show that an increase in the proportion of self-employed individuals in the labor force increases income polarization by tearing down floors at the bottom and allowing higher income potentials at the very top of the hourly income distribution. Recentered influence function regression of inequality measures corroborate that self-employment is a source of income inequality in the labor market.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Note: Number of observations: 65. Country codes in accordance with ISO 3166-1 (2digit). Fitted values \( {\widehat{Gini}}\) = 30.3783 + 0.1963 * Self-employment, Robust standard error (0.0346), Corresponding t-statistic 5.67.

Fig. 2

Note: x-axis trimmed at hourly income of 60 Euro

Similar content being viewed by others

Notes

  1. Note that Halvarsson et al. (2018) provide an excellent survey of the literature on entrepreneurship, income dynamics, and inequality.

  2. Empirical studies with German data mostly differ between employers and solo self-employed (Lechmann and Wunder 2017; Sorgner et al. 2017) because information on whether a business is incorporated is usually not available. International studies use this particular distinction as well (Van Stel et al. 2014).

  3. 30 days per month divided by 7 days per week.

  4. Freelancers are defined as self-employed as well. Our final sample consists of 480 individuals reporting to be self-employed and 246 freelancers.

  5. \(q_{\tau }\) stands for the hourly income at the quantile of interest (\(\tau \)).

  6. Note that the set of control variables includes 140 dummy variables in accordance with the classification of occupations (KldB10), which describe tasks of a job. This ultimately allows interpretation of the effects as income differentials between self-employed and paid employees in similar jobs.

  7. There is a discussion about comparability of incomes from self-employment and wages of paid employees (Lechmann 2015). Moreover, potential misreporting of incomes from self-employment are debated in the literature (Astebro and Chen 2014). In fact, Astebro and Chen (2014) showed that there is a sizable mean financial gain of entrepreneurship after correcting for misreporting. However, the correction methods heavily rely on the underlying assumptions, which can be ”unpalatable” (Astebro and Chen 2014). In our case, we already observe a meaningful average financial markup for the self-employed (see specification (1) in Table 4). In addition the median income of the self-employed is slightly smaller than the one of paid employees (see specification (3) in Table 4), which indicates that the median self-employed obtains slightly lower hourly incomes when compared with a paid employee with identical characteristics. Hence, systematic income under- or misreporting by the self-employed seems to be no problem in our study.

  8. We are indebted to Philippe Van Kerm for sharing his STATA code to run the command inequaly, which helps to predict a variety of RIFs of a variable (Van Kerm 2015). Precisely, we applied his code for calculation of the RIF of the general entropy index as well as the Atkinson inequality measure.

  9. Caliendo et al. (2012) showed that about 70% of surviving subsidized business founders did not become employers 19 months after the start-up. This pattern is not restricted to subsidized founders. Lechmann and Wunder (2017) found that it is rather unlikely for solo self-employed to become employers. Also other studies showed that the majority of entrepreneurs has low growth ambitions (Hurst and Pugsley 2011) and that entrepreneurship is frequently small scaled rather than taking the form of growing productive and prospering firms (Schoar 2010; Stam 2013).

  10. See Frid et al. (2016) for a discussion of the relationship between entrepreneurship and wealth inequality.

References

  • Aghion, P., Akcigit, U., Bergeaud, A., Blundell, R., & Hemous, D. (2019). Innovation and top income inequality. The Review of Economic Studies, 86(1), 1–45.

    Article  Google Scholar 

  • Alejo, J., Gabrielli, M. F., & Sosa-Escudero, W. (2014). The distributive effects of education: An unconditional quantile regression approach. Revista de Analisis Economico - Economic Analysis Review, 29(1), 53–76.

    Google Scholar 

  • Astebro, T., & Chen, J. (2014). The entrepreneurial earnings puzzle: Mismeasurement or real? Journal of Business Venturing, 29(1), 88–105.

    Article  Google Scholar 

  • Astebro, T., Chen, J., & Thompson, P. (2011). Stars and misfits: Self-employment and labor market frictions. Management Science, 57(11), 1999–2017.

    Article  Google Scholar 

  • Atems, B., & Shand, G. (2018). An empirical analysis of the relationship between entrepreneurship and income inequality. Small Business Economics, 51(4), 905–922.

    Article  Google Scholar 

  • Blanchflower, D. G., & Oswald, A. J. (1998). What makes an entrepreneur? Journal of Labor Economics, 16(1), 26–60.

    Article  Google Scholar 

  • Borah, B. J., & Basu, A. (2013). Highlighting differences between conditional and unconditional quantile regression approaches through an application to assess medication adherence. Health Economics, 22(9), 1052–1070.

    Article  Google Scholar 

  • Brenke, K. (2013). Allein tätige Selbständige: Starkes Beschäftigungswachstum, oft nur geringe Einkommen. DIW Wochenbericht, 80(7), 3–16.

    Google Scholar 

  • Caliendo, M., Hogenacker, J., Künn, S., & Wießner, F. (2012). Alte Idee, neues Programm: Der Gründungszuschuss als Nachfolger von Überbrückungsgeld und Ich-AG. Journal for Labour Market Research, 45(2), 99–123.

    Article  Google Scholar 

  • Choe, C., & Van Kerm, P. (2018). Foreign workers and the wage distribution: What does the influence function reveal? Econometrics, 6(3), 1–26.

    Article  Google Scholar 

  • Cowell, F. A., & Van Kerm, P. (2015). Wealth inequality: A survey. Journal of Economic Surveys, 29(4), 671–710.

    Article  Google Scholar 

  • Firpo, S., Fortin, N. M., & Lemieux, T. (2009). Unconditional quantile regressions. Econometrica, 77(3), 953–973.

    Article  Google Scholar 

  • Firpo, S. P., Fortin, N. M., & Lemieux, T. (2018). Decomposing wage distributions using recentered influence function regressions. Econometrics, 6(2), 1–40.

    Article  Google Scholar 

  • Frid, C. J., Wyman, D. M., & Coffey, B. (2016). Effects of wealth inequality on entrepreneurship. Small Business Economics, 47(4), 895–920.

    Article  Google Scholar 

  • Fritsch, M., Kritikos, A. S., & Sorgner, A. (2015). Why did self-employment increase so strongly in germany? Entrepreneurship & Regional Development, 27(5–6), 307–333.

    Article  Google Scholar 

  • García-Peñalosa, C., & Orgiazzi, E. (2013). Factor components of inequality: A cross-country study. Review of Income and Wealth, 59(4), 689–727.

    Article  Google Scholar 

  • Goebel, J., Grabka, M. M., Liebig, S., Kroh, M., Richter, D., Schröder, C., & Schupp, J. (2018). The german socio-economic panel (soep). Jahrbücher für Nationalökonomie und Statistik / Journal of Economics and Statistics.

  • Halvarsson, D., Korpi, M., & Wennberg, K. (2018). Entrepreneurship and income inequality. Journal of Economic Behavior & Organization, 145, 275–293.

    Article  Google Scholar 

  • Hamilton, B. H. (2000). Does entrepreneurship pay? an empirical analysis of the returns to self-employment. Journal of Political Economy, 108(3), 604–631.

    Article  Google Scholar 

  • Hampel, F. R., Ronchetti, E. M., Rousseeuw, P. J., & Stahel, W. A. (1986). Robust statistics: The approach based on influence functions. New York: Wiley.

    Google Scholar 

  • Hurst, E., & Pugsley, B. W. (2011). What do small businesses do? Brookings Papers on Economic Activity, 43(2), 73–142.

    Article  Google Scholar 

  • Lechmann, D. S. (2015). Can working conditions explain the return-to-entrepreneurship puzzle? Journal for Labour Market Research, 48(4), 271–286.

    Article  Google Scholar 

  • Lechmann, D. S., & Wunder, C. (2017). The dynamics of solo self-employment: Persistence and transition to employership. Labour Economics, 49, 95–105.

    Article  Google Scholar 

  • Levine, R., & Rubinstein, Y. (2017). Smart and illicit: Who becomes an entrepreneur and do they earn more? The Quarterly Journal of Economics, 132(2), 963–1018.

    Article  Google Scholar 

  • Maier, M.F., & Ivanov, B. (2018). Selbstständige Erwerbstätigkeit in Deutschland. Forschungsbericht 514. The German Federal Ministry for Labour and Social Affairs (BMAS).

  • Metzger, G. (2015). KfW-Gründungsmonitor 2015. KfW Bankengruppe, Frankfurt a. M.: Tabellen- und Methodenband. Technical report.

  • Moskowitz, T. J., & Vissing-Jorgensen, A. (2002). The returns to entrepreneurial investment: A private equity premium puzzle? The American Economic Review, 92(4), 745–778.

    Article  Google Scholar 

  • Ritzen, J., & Zimmermann, K. F. (2018). Fading hope and the rise in inequality in the united states. Eurasian Business Review, 8(1), 1–12.

    Article  Google Scholar 

  • Schoar, A. (2010). The Divide between Subsistence and Transformational Entrepreneurship. In Innovation Policy and the Economy, Vol. 10, PP. 57–81. University of Chicago Press.

  • Shane, S. (2009). Why encouraging more people to become entrepreneurs is bad public policy. Small Business Economics, 33(2), 141–149.

    Article  Google Scholar 

  • Sorgner, A., Fritsch, M., & Kritikos, A. (2017). Do entrepreneurs really earn less? Small Business Economics, 49(2), 251–272.

    Article  Google Scholar 

  • Stam, E. (2013). Knowledge and entrepreneurial employees: A country-level analysis. Small Business Economics, 41(4), 887–898.

    Article  Google Scholar 

  • Van Stel, A., Wennekers, S., & Scholman, G. (2014). Solo self-employed versus employer entrepreneurs: Determinants and macro-economic effects in oecd countries. Eurasian Business Review, 4(1), 107–136.

    Article  Google Scholar 

  • Van Kerm, P. (2015). Influence functions at work. In United Kingdom Stata Users’ Group Meetings 2015, Stata Users Group.

  • Wagner, G. G., Frick, J. R., & Schupp, J. (2007). The german socio-economic panel study (soep)—scope, evolution and enhancements. Schmollers Jahrbuch: Journal of Applied Social Science Studies, 127(1), 139–169.

    Google Scholar 

Download references

Acknowledgements

I have benefited from comments by Olaf Hübler, Daniel Lechmann, Wim Naudé, Konrad Schäfer, and participants at the 28th EBES conference in Coventry.

Author information

Authors and Affiliations

  1. Institut für Mittelstandsforschung (IfM) Bonn, Global Labor Organization (GLO), IfM Bonn, Maximilianstrasse 20, 53111, Bonn, Germany

    Stefan Schneck

Authors
  1. Stefan Schneck
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Stefan Schneck.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

This study is based on The German Socio-Economic Panel Study (SOEP, https://doi.org/10.5684/soep.v32) from the German Institute for Economic Research (DIW Berlin). The author’s program codes will be provided upon request. Any errors are my own. The author has no relevant or material financial interests that relate to the research described in this paper.

Appendix

Appendix

See Tables 3, 4, 5, and 6.

Table 3 Descriptive statistics
Full size table
Table 4 OLS and conditional quantile regression with dependent variable hourly gross income
Full size table
Table 5 Recentered influence function regression with dependent variable hourly gross income: Inequality measures-complete estimation results with individuals reporting at least 35 working hours
Full size table
Table 6 Recentered influence function regression with dependent variable hourly gross income - complete estimation results with individuals reporting at least 35 working hours
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Schneck, S. Self-employment as a source of income inequality. Eurasian Bus Rev 10, 45–64 (2020). https://doi.org/10.1007/s40821-019-00143-8

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40821-019-00143-8

Keywords

JEL Classification

Search

Navigation