June 2023

IZA DP No. 16271: Wage Employment, Unemployment and Self-Employment across Countries

Poor countries have low wage employment and high self-employment. This paper shows that they also have high unemployment relative to wage employment, and that self-employment increases with this ratio. To understand the sources of these patterns, I build a search and matching model with choice between job search and self-employment and with learning about matches, and calibrate it to match all transition rates between wage employment, unemployment and self-employment as well as separation hazards by job duration, separately for all 37 countries with available data. Quantitative analysis of the model shows that labor market frictions affect self-employment as much as unemployment. Labor market frictions also reduce aggregate output, not only by raising unemployment, but also by worsening the average quality of both wage employment matches and active self-employment projects.