DP4754 Self-Employment Dynamics Across the Business Cycle: Migrants vs Natives

Author(s): Amelie Constant , Klaus F. Zimmermann

Publication Date: November 2004

Keyword(s): self-employment , entrepreneurship , business cycle , migration , Markov chain analysis

JEL(s): E32 , J23 , J61 , M13

Programme Areas: Labour Economics

Link to this Page: www.cepr.org/pubs/dps/DP4754.asp

Economically active people are either in gainful employment, are unemployed or self-employed. We are interested in the dynamics of the transitions between these states across the business cycle. It is generally perceived that employment or self-employment are absorbing states. However, innovations, structural changes and business cycles generate strong adjustment processes that lead to fluctuations between employment and self-employment, directly or through the unemployment state. Migrants are more likely to be sensitive to adjustment pressures than natives, since they have less stable jobs and choose more often self-employment to avoid periods of unemployment. These issues are investigated using a huge micro data set generated from 19 waves of the German Socioeconomic Panel. The findings suggest that the conditional probabilities of entry into self-employment are more than twice as high from the status of unemployment as from the status of employment. Self-employment is also an important channel back to regular employment. Business cycle effects strongly impact the employment transition matrix, and migrants take a larger part in the adjustment process. They use self-employment as a mechanism to circumvent and escape unemployment and to integrate into the host country's labour market.