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Máster en Docencia Universitaria

Presentaciones avanzadas para las aulas

Rocío Arteaga Sánchez

Jesús Iglesias Garrido

Concepción Román

Dr. D. Francisco Pavón Rabasco

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Dependent Self-employmentas a way to evade

Employment Protection Legislation

SERG -Spanish Entrepreneurship Research Group-

Universidad de Huelva

XI Reunión de Economía Mundial

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Outline

1. MOTIVATION

3. OBJECTIVES

5. HYPOTHESES

7. DATA

9. ECONOMETRIC FRAMEWORK

11. RESULTS

13. CONCLUSIONS

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Motivation

Relationship between self-employment and EPL strictness is a matter of controversy (Parker 2007; Audretsch et al. 2007).

Arguments suggesting the existence of a negative relationship:

EPL imposes higher sunk costs for self-employed workers who decide to take on employees.

EPL alters the relative valuation between salaried-work and self-employment.

But also, a positive relationship may be considered:

EPL and schemes oriented to encourage people to start business

Mutual agreements between employers and employees

“Dependent” self-employment transitions

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Objectives

i. Do employers in countries with relatively more stringent EPL tend to evade these regulations making use of self-employment promotion policies?

iii. Which paid-employees are more likely to accept agreements with their employers and to become “dependent” self-employed?

v. What are the differences between those employees becoming “dependent” self-employed and those becoming “true” self-employed?

vii. How business cycle and institutional environment affect “dependent” self-employment phenomenon?

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Hypothesis 1

Mutually agreements between employers and employees

Employment protection legislation strictness+

Self-employment promotion policies

Occupational choice distortion: “Dependent” self-employment transitions

Employers evade the more onerous elements of the EPLEmployees take advantage of incentives and tax allowances

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Hypothesis 2

Counter-cyclicaltransitions from PE to “dependent” SE

Pro-cyclical transitions from PE to “true” SE

Business cycle effects:

Recession push-hypothesis

Prosperity pull- hypothesis

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Hypothesis 3

The potential value of the severance payment might be another incentive to arrange a transition from paid-employment to self-employment.

Employer and employee can simulate a dismissal in order to receive an additional compensation remaining a short term in the unemployment state before to complete the transition to self-employment.

Self-employment Unemployment Paid-employment

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Data

European Community Household Panel

1994-2001 period

Information directly comparable

Men and women aged 21 to 59

Workers in the agricultural sector are excluded

Full-time workers

Incomes are corrected by:

Purchasing Power Parity (across countries) Harmonised Consumer Price Index (across time)

Standardised unemployment rates

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Definition “dependent” vs. “true” self-employment

Individuals in our dataset are asked:

Main activity status (PE, SE, unemployed, retired...)

Year of start of current job

From this information we define:

“True” self-employment transitions (TSE)PE in t-1 switching to SE in t and declaring t as starting year of current job

“Dependent” self-employment transitions (DSE)PE in t-1 switching to SE in t and declaring t- x as starting year of current job -while they still were PE -

Standard Binary Logit Models

(1) (2)

(3) (4)

Xi,t-1 Individual characteristics and economic conditions in period t-1

β Associated vector of coefficients to be estimated

ui Time-invariant unobserved heterogeneity (person-specific effect)

εi,t Random error term (not person-specific unobserved variables)

F(.) follows a logit distribution

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Econometric Framework

( )1tt PETSE Pr −

( )1tt PEDSE Pr − ( )t1tt SEPEDSE Pr →−

( ) ( )i1t,i'

t,ii1t,i' uXF0uX Pr +=>++ −− βεβ

( )1tt PESE Pr −

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Results (III) EXERCISE (1) EXERCISE (2) EXERCISE (3) EXERCISE (4)

Prob [SE t | PE t-1] Prob [TSE t | PE t-1] Prob [DSE t | PE t-1] Prob [DSE t (vs. TSE t)]

Variables Marg. eff. t-stat. Marg. eff. t-stat. Marg. eff. t-stat. Marg. eff. t-stat.

Incomes

Dwelling owner 1.93% 0.3 -7.73% -0.89 16.05% 1.68* 12.21% 1.62*Capital & property

incomes (1 lag)(x e-3)2.71% 3.58*** 1.92% 1.58 3.07% 3.23*** 2.15% 1.62*

Work incomes (x e-2) 0.1% 0.29 0.33% 0.74 0.01% 0.01 -0.53% -0.88Business cycle

Unemployment rate 1.33% 0.8 -4.42% -1.82* 7.63% 3.12*** 6.75% 3.13***Country

Austria(5) -31.54% -1.74* -41.11% -1.84* -33.44% -1.16 20.6% 0.66

Belgium (5) -52.81%-4.72**

*-37.28% -2.04** -79.21%

-5.75**

*-38.18% -1.7*

Denmark (5) -16.48% -0.87 -24.61% -1.05 -11.12% -0.35 12.46% 0.44

Finland (5) 27.34% 1.61 -1.02% -0.05 67.53% 2.2** 38.18% 2.47***

Germany (5) -56.4%-5.08**

*-43.68%

-2.45**

*-78.92%

-5.26**

*-19.79% -0.99

Italy (5) 63.65% 3.45*** 27.6% 1.22 127.22% 3.54*** 44.95% 3.37***

Netherlands (5) -44.98%-2.96**

*-69.32%

-3.52**

*1.45% 0.04 59.54% 2.41**

Portugal (5) 24.95% 1.09 3.55% 0.13 70.22% 1.61 41.57% 1.81*

United Kingdom (5) -36.95%-2.69**

*-3.9% -0.16 -115.3%

-9.47**

*-85.31% -6.88***

Reference categories: (5) Spain

Log likelihood -7442.81 -4798.64 -3446.73 -815.72

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Labour market institutions variables (I)

Regular Employment Protection Legislation (OECD)− Procedural inconveniences− Notice and severance pay for no-fault individual dismissals − Difficulty of dismissal

Temporary Employment Protection Legislation (OECD)− Fixed-term contracts− Temporary Work Agency Employment

Social Security Laws Index (Botero et al. 2004)− Old age, disability and death benefits− Sickness and health benefits − Unemployment benefits

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Labour market institutions variables (II)

Expenditure on Active Labour Market Policies as % of GDP(OECD)− Public Employment Services and administration− Labour market training− Youth measures− Subsidised employment− Measures for the disable

Potential Severance Payment (OECD Employment Outlook 1999, ch. 2)− Severance pay for individual dismissal of a regular employee with tenure

beyond any trial period− Personal grounds or economic redundancy but without fault− Information based on legal regulation, but also on averages found in

collective agreements or individual employment contracts.− Employment duration, salary, type of contract, age.

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Results (IV)

EXERCISE (1) EXERCISE (2) EXERCISE (3) EXERCISE (4)


# observations 157016 156293 156195 1544

# transitions 1544 821 723 723 vs. 821

Predicted probability 0.00463 0.00257 0.00129 0.45965


Business cycle

Unemployment rate -0.36% -0.43 -4.43%-3.09**

*6.11% 4.9*** 5.32% 3.99***

Labour Market Institutions

EPL index for regular

employment0.86% 0.26 -8.09% -1.79* 32.56% 5.55*** 21.48% 4.17***

EPL index for temporary

employment11.94% 4.52*** 6.95% 1.75* 26.21% 6.78*** 10.57% 3.01***

Social Security Laws index 573.93% 9.06*** 362.46% 3.42*** 973.91% 9.18*** 344.93% 3.49***

Expenditure on ALMP

as % of GDP-7.67% -1 -32.15% -2.9*** 74.04% 4.97*** 57.28% 4.45***

Log likelihood -7472.76 -4810.06 -3486.88 -832.45

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Results (V)

EXERCISE (1) EXERCISE (2) EXERCISE (3) EXERCISE (4)


# observations 157016 156293 156195 1544

# transitions 1544 821 723 723 vs. 821

Predicted probability 0.00462 0.00261 0.00140 0.46854


Business cycle

Unemployment rate -0.44% -0.56 -4.01%-3.02**

*4.12% 3.41*** 3.89% 3.35***

Labour Market Institutions

EPL index for temporary

employment12.53% 4.81*** 7.27% 1.88* 24.01% 6.34*** 9.25% 2.57***

Social Security Laws index 574.59% 9.08*** 370.47% 3.47*** 888.7% 8.57*** 326.70% 3.36***

Expenditure on ALMP as %

of GDP-8.49% -1.15 -30.56%

-2.81**

*35.4% 2.82*** 40.03% 3.64***

Potential severance

payment (x e-3)-0.21% -0.64 -1.99%

-2.85**

*0.89% 2.83*** 1.68% 3.36***

Log likelihood -7472.58 -4804.81 -3498.80 -838.04

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Conclusions

WHAT WE OBSERVE …

• EPL strictness and ALMP increase transitions PE DSE→

• Two opposite business cycle effects on transitions to TSE and DSE

• Severance payment increases the opportunity cost of SE

OPEN QUESTIONS

• Are policies aimed to encourage SE well designed?

• Should effective measures to detect and combat DSE be designed?

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Dependent Self-employmentas a way to evade

Employment Protection Legislation

Thanks for your attention!

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