Poster Paper: Self-Employment Penalties, Growth, and Labor Market Regulations

Friday, November 8, 2013
West End Ballroom A (Washington Marriott)

*Names in bold indicate Presenter

Nadwa Mossaad1, Tim Gindling1 and David Newhouse2, (1)University of Maryland, Baltimore County, (2)World Bank
While several studies have examined differences in the wage structure between informal and formal sectors in in specific developing countries, little is known about how wage gaps between the self-employed and employees differ across countries.  This paper uses a unique database of household surveys collected by the World Bank to document wage differentials between the self-employed and wage and salary employees over time and across more than 60 low, middle and high-income countries. We find that in approximately three quarters of the surveys, there is a wage penalty for self-employment. On average, the wage penalty is large for low-income countries; falls as per capita income increases, and rises again for high-income countries. Patterns with respect to labor market regulations are partially consistent with the canonical two-sector model. Countries where it is harder to start a business have moderately smaller self-employment penalties, presumably due to the exit of less productive entrepreneurs. On the other hand, there is no evidence that countries with more rigid employment regulations have larger self-employment penalties.