The Macroeconomics of Self-Employment: On Risk, Flexibility, and Productivity

Working for oneself (as a self-employed person) is clearly different from working for someone else (as an employee). Self-employed workers enjoy greater independence and flexibility in shaping their working hours than employees. On the other hand, self-employed workers face greater risk, as employees have a guaranteed salary as long as their employer doesn't go bankrupt or lay them off, and self-employment income can vary from month to month. Furthermore, while some self-employed individuals become entrepreneurs employing employees, many work independently, for example, as freelancers. Working for a company, whether as an employer or an employee, brings significant benefits: specialization and economies of scale. Therefore, the freedom and flexibility of freelancing comes with the cost of giving up the benefits of working with others.

In this project, we will explore the causes and consequences of self-employment at both the macro and micro levels. This is a timely topic, given the development of the so-called The gig economy and the emergence of new AI-based tools, which are pushing many workers into non-standard employment. The COVID-19 pandemic has further highlighted that employees and the self-employed in developed economies do not benefit equally from state support. For example, the self-employed typically do not have access to unemployment benefits. Such asymmetries have historical justifications – in the past, most self-employed were also employers. The growing importance of freelancing seems to be a sufficient argument to rethink support for the self-employed.

The project will utilize both publicly available macroeconomic data, as well as microeconomic data from representative surveys and restricted government data from countries that collect and share this type of data for research, while also leveraging the unique characteristics of their legislation and institutions to develop general conclusions about economic policy design and self-employment. We expect that the grant will lead to the publication of five scientific articles divided into two thematic parts.

In the first part, we will focus on analyzing the consequences of the self-employment rate for unemployment rate dynamics. We will examine whether self-employment influences the impact of monetary policy on unemployment (the so-called Phillips curve), as well as whether national unemployment dynamics over the business cycle depend on the extent to which the economically active population engages in self-employment.

In the second part, we will analyze the effectiveness of the British benefit system, Universal Credit, which treats the self-employed and the unemployed asymmetrically. We will also use Dutch administrative data on self-employed and employees to examine the optimality of differences in the tax regimes to which they are subject, as well as whether freelancing leads to business start-ups and the employment of others. We will also leverage parental leave reforms in Denmark to examine whether mothers of children whose fathers are self-employed return to work more quickly after the birth of a child.