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MasterThesis_Arsova
1. The impact of demographic, economic, and
institutional factors on flexible
employment:
International macroeconomic evidence
Author: Aleksandra Arsova
Student no.: S2529923
Faculty of Economics And Business Administration, Vrije Universiteit Amsterdam
Master Thesis submitted in partial fulfillment of the requirements for the degree of
Master of Science in Economics
July 7, 2016
University Supervisor: Dr. Pieter Gautier
Internship Supervisor: Krista Hoekstra1
Abstract
Flexible employment is defined as the share of temporary and self-employment
in an economy. While an increase in flexible employment might mean that labor
markets become more able to absorb shocks, it also holds important implications for
job security and its effect on public finances in a country. Organization for Economic
Cooperation and Development (OECD) data from 1997 to 2014 reveal substantial
differences in the levels and trends of flexible employment across countries. This the-
sis uses a fixed-effects model to explore the drivers behind international variation in
flexible employment. The results indicate that when it comes to temporary employ-
ment none of the selected determinants make a significant contribution in explaining
its variation. On the other hand the share of self-employed in a country was found
to be significantly associated with globalization, age, and the size of the agricultural
sector.
JEL codes: J4; J48; J21; F66
1
Scientific researcher at the Netherlands Bureau for Economic Analysis (CPB)
3. Acknowledgements
I would like to express my gratitude to the Netherlands Bureau for Economic
Policy Analysis (CPB) for facilitating this research. Here I have to mention Krista
Hoekstra to whom I am extremely thankful and indebted for sharing her expertise,
sincere and valuable guidance, and encouragement extended to me; as well as to
the program leader Rob Euwals. Your careful and precious guidance were extremely
valuable for my study both theoretically and practically. I consider myself as a very
lucky individual as I was provided with an opportunity to be a part of an organiza-
tion such as the CPB.
It is my radiant sentiment to place on record my best regards and deepest sense
of gratitude to my supervisor Pieter Gautier. I owe you lots of gratitude for having
shown me how to be an ideal scientist, a good supervisor and a kind person.
Lastly, I am immensely grateful to my family for their support and love all these
years. They provided me with the motivation and drive to finish my graduate work
here at the Vrije Universiteit. Thank you.
2
4. 1 Introduction
Labor economists’ long-standing interest in the changing nature of labor markets has
cultivated a large literature concerned with the market’s flexibility. Labor market
flexibility is the response to increasing dynamics leading to the emergence of alter-
native forms of employment. An increasing number of workers enter in temporary
agreements with their employer or switch to self-employment. The nature of the
contract determines the possibilities of workers and employers to adjust to changes
in the economic environment. As such, labor market flexibility is a very important
indicator of the ability to absorb shocks and has important implications for the fu-
ture social security of employed persons. Yet, relatively little is know about the
determinants of these non-standard labor relations.
Changes that came about with industrialization led the labor market to demand
more flexibility. After the 1970s, increased transmissivity of shocks between coun-
tries as well as other factors such as globalization and technological change posed
new challenges to the standard employment relations (Kalleberg, 2000). Existing
research recognizes the increasing role of temporary and self-employment on the la-
bor market (Blau, 1987, Dolado et al., 2002, Holmlund and Storrie, 2002, Polavieja,
2006). By now, what was know to be the norm in regular employment has begun
to unravel. Sluggish growth and high unemployment rates in Europe exploited the
capacity of full time employment. Hence, it is suspected that economic factors played
an important role in the development of flexible employment. In addition to these
factors, the change in demographics could have also had an effect on temporary and
self-employment. For example, the aging of the population might work in both direc-
tions for permanent contracts; on one hand older workers are more often self employed
(C¨orvers et al., 2011), but more work experience can also have a negative effect on
self-employment according to some studies (De Wit and Van Winden, 1989, Evans
and Leighton, 1989). Non-standard work might have been triggered by the interna-
tional influence that economies have on each other due to globalization. Increased
trade has provided advanced economies with the opportunity to reap the benefits
of lower import prices. This has worked in the direction of diminishing the labor
share in these countries. Next to this, technological change is a non-negligible fac-
tor when it comes to explaining variations in temporary work and self-employment.
Developments in technology might have made fixed-term contracts more attractive
by making certain skills obsolete, firms to move costly operations to other countries,
and allow for more reliance on outside suppliers. Lastly, the institutional setting lies
in the heart of the debate of non-standard labor relations. A considerable volume of
economic research has been devoted to investigating the effect on employment protec-
1
5. tion legislation (EPL) and tax incentives on changes in the nature of contracts. More
often than not, studies link EPL to the incidence of temporary employment. One
bulk find that stricter EPL increases temporary employment (Kahn, 2007), while
other report no clear net effect (Boeri and Garibaldi, 2007, Booth et al., 2002).
Recent developments in temporary and self-employment have heightened the need
for studying labor market flexibility. For example, incresase in temporary workers
in the Netherlands and Portugal make research on the issue important for their la-
bor markets. But mounting concern with temporary and self- employment is by no
means confined to the Dutch or Portuguese public. The importance of studying what
is driving these labor relations lies in their ability to allow for flexibility in produc-
tion but also in their threat to job security. Despite this, there remains a paucity of
evidence on the issue. In order to carefully assess the trends in flexible employment
and its implications, discovering the core factors that contribute to these trends is
of utmost importance. Hence, central to this study is the following research question:
To what extent can variations in temporary and self-employment be explained by
common factors such as globalization and technological change as opposed to
country-specific factors such as institutional ones?
This thesis seeks to examine the changing nature of non-standard labor relations
by exploring the drivers behind it. Subsequent to this, there are two primary aims:
1) to investigate global and country-specific trends in flexible employment 2) to
ascertain whether the causing factors are of international or country-specific nature.
A holistic approach is utilized, integrating economic, demographic, and institutional
factors into the model. Understanding the link between these factors on one hand
and the rise in flexible employment on the other, is crucial for identifying the space
for policy that will make use of this flexibility in a most efficient manner. Drawing
upon a fixed-effects analysis, this study attempts to answer whether non-standard
labor contracts are a global rather than a local issue.
There are several important areas where this study makes an original contribu-
tion. First, it undertakes a pioneering move in investigating the factors that can
explain the rise in flexible employment rather than the sole trends in the same on a
country level. Second, it is also one of the first studies investigating the phenomena
through an international analysis. Nonetheless, this study is also subject to limita-
tions. The availability of the OECD data limits the analysis to 17 years. Due to
methodological constraints, country-specific effects cannot be examined. The reader
should bear in mind that the study is based on 21 OECD countries, and the findings
cannot be directly extrapolated to other countries worldwide.
The thesis is composed of seven themed chapters. First the theoretical foun-
2
6. dations for the research will be presented. Emphasizing the aim, chapter three lays
out the possible determinants of temporary and self-employment entering the model.
Chapter four describes the data and methodology used, as well as data trends in flex-
ible employment, while chapter five contains the results followed by their discussion
in the succeeding chapter. Chapter seven concludes the thesis.
Throughout the study, the term flexible employment and non-standard labor
relations will be used interchangeably. They both refer to the amount of employees
engaged in temporary work or self-employment. Permanent workers are employees
with paid leave entitlements, temporary workers are those holding a fixed-term or
seasonal contract, and the self-employed persons are defined as the sole owners or
joint owners of unincorporated enterprises in which they work.
2 Theoretical Background and Prior Research
Different theories have been applied in the analysis of labor markets, but probably
the most prominent one is the traditional neo-classical theory. Essentially, the theory
analyses the labor market as a unified entity where allocation of resources is done by
price mechanisms. Here, each worker receives a wage equal to her marginal product.
However, this notion would imply perfect information on the labor market. In ab-
sence of perfect information, employers cannot precisely monitor the effort of their
employees. There has been a growing intuition that indeed the labor market contains
asymmetric information, and incentives should enter the employee’s effort equation.
Shapiro and Stiglitz (1984) are among the pioneers to articulate this idea formally in
what is now well known as the efficiency wage model. Here, monitoring and wages
are believed to be substitutes. In the absence of perfect information, employers have
to pay workers above their reservation wage in order to motivate them. This means
that sometimes wages differ from their market-clearing level. It implies that in times
of certain shocks, when wages need to decrease, there is involuntary unemployment.
A way to avoid such involuntary employment is a rapid adjustment of the labor mar-
ket. The ability of the labor market to rapidly adjust to social or economic changes
is referred to as labor market flexibility. However, if the efficiency wage model re-
veals something about the rigidity of wages, through which mechanism can the labor
market adapt in recessions? Kalleberg (2000) suggested that by using non-standard
workers such as temporary workers or independent contractors, employers can staff
minimally in recessions and increase their workforce during booms, without directly
changing the wage structure. In this regard it seems as absorbing these shocks can
be done at the account of job security. On that note Maurin and Postel-Vinay (2005)
conclude that “continental European countries, such as Germany or France, do not
3
7. tolerate wage inequalities to the same extent as the United Kingdom or Ireland; yet
they do tolerate much more substantial inequalities in job security. Mediterranean
countries, such as Italy or Greece, do not accept wage inequalities as large as Ger-
many or France, but do accept still larger job security inequalities.” (p. 241). By
the same token, countries with a long-standing and historical aversion towards wage
inequality tend to increase their labor market flexibility at the cost of job security.
In light of this, DiPrete et al. (2006) find that the French labor market has absorbed
macroeconomic shocks though fluctuations in job security rather than fluctuations
in wages. Hence, in Europe, where wages have proven to be mainly downward rigid,
labor market flexibility is largely reflected into the use of alternative forms of working
contracts.
The efficiency wage model suggests that employers will pay their employees a
wage that will satisfy the no shirking condition - a wage that will motivate the
employee to put in the maximum amount of effort and will relief the employer of
additional monitoring. G¨uell (2000) argued that when applying the efficiency model
to fixed-term contracts outcomes might differ. Wages in fixed-term contracts have no
incentive role, but rather their renewal rate to permanent contracts. If most of these
contracts do not get transformed into permanent ones later on, employees’ optimal
choice would be to almost always avoid the cost of effort today and shirk. In such
situation temporary workers would be a constant marginalized group, a situation
indicative of a job market polarization.
Another alternative to permanent contracts is self-employment. Research on the
economics of self-employment has been expanding over the past years. Extensive
work on the international level includes studies by Arum and M¨uller (2009), Blanch-
flower (2000), Parker and Robson (2004), Torrini (2005).There is also a plethora
of micro-econometric work and studies on the national level such as De Wit and
Van Winden (1989), C¨orvers et al. (2011) for the Netherlands; Rees and Shah (1986),
Robson (1998), Dawson et al. (2014)for the United Kingdom (UK); Carrasco (1999)
for Spain; Hanley (2000), Earle and Sakova (2000) for Eastern European economies.
Self-employment can be seen as a survival strategy or the desire to be one’s own
boss. This categorizes the choice as necessity- or opportunity-driven. Both ways to
self-employment can also be explained with the efficiency wage model.
If a worker accepts a certain job, it would imply that benefits from regular em-
ployment ought to be higher than those from self-employment. With employment
contracts not including unobservable potential of the workers, according to the ef-
ficiency wage hypothesis, a firm has to increase its wage level in order to attract
more productive workers. It is then not controversial to argue that more produc-
tive workers have higher reservation wages, and hence self-employment as an outside
4
8. opportunity might be more attractive to them. One cannot argue that other firms
might compete for these workers by offering them higher wages, as this would imply
that firms can observe the productivity level of a worker (Malcomson, 1981). To
reiterate, what the efficiency model reveals is that in order for a worker to choose to
be self-employed, its reservation wage must be particularly high, a feature common
in more productive workers. Experience is often linked to productivity, and its con-
nection to self-employment has been confirmed by several studies (Rees and Shah,
1986, Robinson and Sexton, 1994). Conclusively, older more experienced individuals
might face more self-employment opportunities. On the other hand, the efficiency
wage model reveals that in times of recessions wages are not pushed to the market
clearing point, causing involuntary unemployment to exist. Workers left without a
job can then find refuge in self-employment. The idea is that either workers enter
self-employment due to inability to find waged work, or see greater returns through
entrepreneurial opportunities in self-employment. Thurik et al. (2008) distinguish
the two as the ’refuge effect’ and the ’entrepreneurial effect’.
To reiterate, due to frictions, labor markets do not always clear. As wages do
not always reach their market clearing point, there are times when labor market
flexibility is needed. Such flexibility can be reflected in the increased use of non-
standard labor contracts. Two such labor relations are the focal point of this study:
temporary work and self-employment.
Increasing labor market flexibility was high on the OECD agenda, where the orga-
nization has put forward that the higher job creation in the US as opposed to Europe
is due to very rigid labor market in the latter (Rodgers et al., 2007, Tytell and Jau-
motte, 2008). This would imply that besides economic factors, institutions also have
some influence in creating an environment where labor markets can rapidly adjust.
The World Bank’s World Development Report of 2005 also argued that lifting bar-
riers and liberalizing the labor market would improve the conditions for job creation
in Europe, while the IMF has also supported the view throughout its publications.
However, this study distances from evaluating the degree and consequence of labor
market flexibility. Rather, the study aims to evaluate whether flexibility reflected
through the use of temporary workers or independent contractors (self-employed),
can be explained by certain factors.
The theoretical foundations of this study find their roots in previous work (Boeri
and Garibaldi, 2007, Kahn, 2007, Kalleberg, 2000, Maloney, 1998, Parker and Rob-
son, 2004). These earlier studies have tried to review the theory behind non-standard
labor relations; link employment protection legislation to the incidence of tempo-
rary work; explain international variation in self-employment; predict the share of
workforce in self-employment. These studies have contributed towards incorporating
5
9. possible determinants of temporary and self-employment in the current research. Al-
though studies on the drivers behind self-employment exist in a very small number,
the paucity of research done on determinants of temporary work is surprising. The
following section will discuss the potential factors of temporary and self-employment
and give rationale for their inclusion as predictors in the models.
3 Determinants
Explaining international variations in flexible employment begins with dividing de-
terminants of the same in different categories. The topic can be best treated under
three headings: demographic, economic, and institutional factors. It should be em-
phasized that no attempt is made here to be exhaustive. The intention of the study
is to give an impression of the main determinants that throughout the literature and
in the author’s view can best describe variations in the phenomena at stake. The
following subsections will individually elaborate on the rationale of including these
factors in the analysis.
3.1 Demographics
The structure of the population might play an important role in the use of non-
standard working arrangements. If fixed-term contracts serve as a screening tech-
nique for employers, young unexperienced individuals would be more likely to be
hired as temps. On the note Kahn (2007) finds that liberalization of fixed-term
contracts raises the relative concentration of youth in this jobs. Nevertheless, older
workers and women might also be considered as marginalized groups that more often
receive fixed-term contracts.
Age also plays an important role in the choice of going into self-employment.
Older workers usually have more experience, human capital, financial means and
networking opportunities that help to grow a business, but younger workers might
be more willing to undertake necessary risks. Here, Visschers et al. (2014) find that
entrance to self-employment from unemployment increases with age, but the effect
of age decreases after a person reaches her fourties. This might mean that the self-
employed are less risk averse, and risk aversion increases with age (De Wit, 2012).
On the other hand, C¨orvers et al. (2011) report that older workers are more often
self-employed. An aging population might then have very different implications for
self-employment. Hence, distinguishing a direction and size of the effect a priori is
impossible without conducting an analysis of the relationship between demographics
and self-employment.
6
10. 3.2 Economic Factors
3.2.1 GDP growth
For much of the twentieth century permanent contracts were the norm, however
recent global changes made independent contracting and temporary work a promi-
nent alternative. Stagnant economic growth and high unemployment rates in Europe
made it clear that these economies were unable to provide permanent employment
for the total working population (Kalleberg, 2000). A suggested relationship be-
tween economic growth and temporary workers demand would not be a novel idea.
By using temps employers can staff minimally during ’bad times’, and increase their
labour supply on an ad-hoc basis in booms. Similarly, the unemployment rate of an
economy also acts as a proxy for the business cycle. A lack of full-time vacancies and
low job creation leads to an increase in the unemployment rate. In such times, both
workers and employers might opt for temporary work. On the other hand, the busi-
ness cycle might work in another direction for temporary employment. For example,
Polavieja (2006) reports that countries experiencing severe unemployment shocks,
have a lower incidence of temporary employment. This might support Kalleberg
(2000)’s contention that temporary employment serves as an immediate increase in
staffing when times are good, but the same workers might get dismissed once a shock
hits. However, it is impossible to unambiguously assign a sign and direction of the
cyclical behavior of temporary employment a priori. Therefore this study engages
into determining the relationship between temporary employment and GDP growth,
other factors considered.
Previous research seems to suggest that self-employment follows a cyclical behav-
ior (Visschers et al., 2014). In this context, self-employment is mostly discussed as a
consequence of the entrepreneurial or the refuge effect (Thurik et al., 2008). Parker
and Robson (2004) report positive relationship between real GDP per capita and
self-employment. This might be indicative of the fact that better economic condi-
tions lead to buoyant opportunities for the self-employed, further implying that the
entrepreneurial effect might override the refuge effect, as reported in (Thurik et al.,
2008). On the other hand, there are also studies suggesting that the self-employed
are more often pushed into this state due to lack of work opportunities (Earle and
Sakova, 2000), providing evidence for the countercyclical nature of self-employment.
3.2.2 Sector Share
The sector structure of the economy can be important in predicting the share of
flexible employment. Temporary workers are often seasonal workers and a bigger
7
11. agricultural sector might account for a larger share of employees holding a fixed-
term (seasonal) contract. The incidence of self-employment is also often linked to the
size of the agricultural sector (Blanchflower, 2000), with many of the farmers being
registered as self-employed. On the other hand, given easier access to technology, a
bigger service sector might provide a fertile ground for self-employment opportunities.
3.2.3 Globalization
Trade theory would expect that the increased trade and unskilled labour intensive
imports would put a downward pressure on wages in advanced economies, hence
labour share would be expected to decline. Tytell and Jaumotte (2008) support this
thesis and find that due to higher export prices and lower import prices labour share
in advanced economies has been declining. This is not surprising as export goods from
advanced economies are usually more capital intensive. When this is combined with
low import prices of raw or manufactured goods labour demand in these economies
shrinks pressuring wages downwards. As put forward by the efficiency wage model,
employers would not be too sensitive in offering lower wages to temporary workers
as this would not directly affect their productivity but rather would the renewal
rate of their contracts. Further, as in most European countries wages are rather
rigid (Maurin and Postel-Vinay, 2005) and generally temporary workers are paid less
(da Silva et al., 2015), globalization might make the use of temporary workers more
attractive. Additionally, increased trade does pose new opportunities for businesses
but also exposes them to more foreign shocks. This would imply that while firms
do face new production opportunities, they are now in anticipation of more demand
fluctuations. Employers can solve this issue by staffing more on temporary workers.
On the other hand, if the share of temporary workers is constituted of low-skilled
individuals, and globalization leads to a lowered demand for such workers in advanced
economies (Tytell and Jaumotte, 2008), temporary employment would be expected
to decrease as the process of globalization intensifies and firms engage into resource
shifting.
In the case of self-employment, globalization might expand the horizons towards
new market opportunities. Access to new markets would lead to diversification in
demand and new possibilities for innovation, inducing the ’entrepreneurial effect’ on
self-employment (Thurik et al., 2008, Visschers et al., 2014). In this case, globaliza-
tion would positively affect the share of the self-employed. However, if globalization
leads to a lower labor demand in advanced economies (Tytell and Jaumotte, 2008),
many might find refuge in self-employment. Albeit through a different channel, glob-
alization would then also lead to an increase in self-employment.
8
12. 3.2.4 Technological Progress
Technological progress might have also facilitated the use of non-standard labour
relations. Developments in transport and communication make it easier for employers
to move some operations to foreign, less costly parts. Naturally, this diminishes
the job creation rate and makes alternative contracts more attractive. Kalleberg
(2000) has also argued that this has made it easier for firms to specialize their
production, assemble temporary workers quickly and rely more on outside suppliers.
Similarly, technological progress has made it easier to substitute labour with capital,
diminishing the need for permanent contracts. On the other hand technological
change might increase the need for permanent contracts. Higher accumulation in
capital and easier use of technology might provide for more job opporunities and open
skill-specific positions. Technological progress has important implications for the self-
employed as well. General skills might become more important since technological
change will allow for workers to perform different tasks. By the same token, self-
employment becomes less costly and a very feasible option.
3.3 Institutions
A considerable volume of economic research has been devoted to linking non-standard
labour relations to employment protection legislation (Boeri and Garibaldi, 2007,
Booth et al., 2002, Cazes and Nesporova, 2003). EPL is central to the hiring and firing
of workers as it represents the cost for both of these actions. In the light of the recent
economic crisis many European countries have relaxed the strictness of EPL in hope
for more job creation and labor market flexibility. If one focuses on a simple labor
demand model, it is obvious that protection on contracts would directly influence
employee turnover. Since stricter EPL implies higher labor costs, one would expect
for labor demand to be negatively associated with it. This is exactly what drove most
countries into adopting laxer policies - increase of labor demand and thus higher job
creation rate. On the issue, Messina and Vallanti (2007) argue that EPL affects both
hiring and firing incentives, and no clear net effect can be distinguished. Boeri and
Garibaldi (2007) present the so called honeymoon effect where there are immediate
employment gains from liberalizing temporary contracts, but eventually the same are
dissipated by the decline of permanent contract employees. Furthermore, although
a low protection on temporary contracts might boost their use, the same also might
imply that these workers are the first ones to go once a shock hits. From here, it is
then impossible to isolate a clear net effect of EPL on temporary work.
Since it represents part of the labor costs, EPL is also important for self-employment.
If the self-employed are more low-skilled workers pushed into self-employment by ne-
9
13. cessity, these are the people who are more likely to receive a fixed-term rather than
a permanent contract on the job market. A relatively low protection on temporary
contracts might make self-employment a more attractive option for them. On the
other hand, if the self-employed are more experienced, productive workers relative
high protection on regular jobs will make self-employment less attractive for them.
From an employer’s perspective, hiring self-employed as independent contractors
might be a good idea when employment protection is relatively high for both types
of contracts.
In order to investigate this issue, the study examines the relationship of the
gap in protection on both contracts and temporary or self-employment. Hence,
employment protection legislation is taken as a proxy for institutions. In this regard,
the study might be limited. EPL was chosen as representative of institutions due
to the availability of data, its harmonized measure, and importance to the hiring
and firing costs. However, institutional differences between countries cannot be fully
captured by this proxy.
4 Data and Methodology
4.1 Data Patterns
4.1.1 Temporary Employment
Prior to analyzing the developments of temporary work, it is useful to first define this
phenomenon.Throughout this study, temporary workers are defined as all workers
who have entered into a fixed-term contracts with their employers or are seasonal
workers. Seasonal workers cover all employees whose expected duration of main job
was less than one year with a temporary contract supplied as the reason. Fixed-
term contracts are seen as insinuated by the employer rather than the employee. In
other words, opting for a fixed-term contract is usually a decision that is not directly
brought by the employee herself. In some instances these types of contracts are seen
as a stepping stone to a permanent job.
The majority of employment relations in the OECD are are still characterized by
permanent contracts. However, in many of these countries fixed-term contracts are
starting to assume a larger share of the total employment (da Silva et al., 2015), and
the data are indicative of a general rise in temporary employment (Figure 1). The
International Labor Office (2015) also confirms this increase and gives three major
reasons for it: cost advantages, flexibility, and technological change.
As aforementioned, fixed-term contracts are seen in many countries as a screening
10
14. Figure 1: Temporary employment has been on the rise
technique for employers and hence a stepping stone to a regular job for employees.
However, in other instances temporary work can be seen as a dead-end situation
for some workers. Evidence on the issue remain mixed (de Graaf-Zijl et al., 2011,
Kvasnicka, 2009).
The level of temporary employment seems to vary per country (Table 1). While
a lot of the countries have a stable development of the share of temporary workers,
the sample also includes ’risers’ such as the Netherlands and Portugal.
11
15. Temporary Employment Ratesa
by Country
1997 2014 ∆b
Australia 3.5 4.9 +1.4
Austria 5.7 7.9 +2.2
Belgium 5.2 7.4 +2.2
Czech Republic 7.5 8.4 +0.9
Denmark 10 7.7 -2.3
Finland 15.4 13.2 -2.2
France 11.4 14 +2.6
Germany 10.2 11.6 +1.4
Greece 5.6 7.5 +1.9
Hungary 5.5 9.6 +4.1
Ireland 7.4 7.6 +0.2
Italy 5.7 10.2 +4.5
Netherlands 9.9 18 +8.1
Norway 10.8 7.2 -3.6
Portugal 8.6 17.2 +8.6
Slovak Republic 4.2 7.5 +3.3
Spain 24.2 19.8 -4.4
Sweden 12.8 15.7 +3.1
Switzerland 9.2 11 +1.8
Turkey 9.5 8.6 -1.1
United Kingdom 6.4 5.5 -1.0
a
Temporary Employment as a percentage of total employment
b
Change in percentage points
Table 1: Temporary employment shares 1997 and 2014, 21 OECD countries
During the period 1997-2014, the Netherlands has experienced an increase in the
share of temp workers for 80%. Namely, in 1997, 10% of the employed persons were
on a fixed-term contract while in 2014 this number grew to 18%2
. The observed rapid
rise in temporary employment in the Netherlands was an additional motivation to
conduct this study. As (Figure 2) shows, the share of temporary employment in the
Netherlands has been well above the sample average for the period studied.
2
The Dutch situation was one of the motivations for the study. Figures depicting fluctuations
in both temporary work and self-employment can be found in Appendix D
12
16. Figure 2: Temporary employment in the Netherlands vs. the sample’s average
The number of Portugese workers on a fixed-term contract grew from 9% in 1997
to 17% of the total employment in 2014. What the both countries have in common
is a strict employment protection regulation on permanent and more lax regulation
on fixed-term contracts, hence a higher EPL value.
Another ’riser’ is Italy, where in particular temporary work agency has been
increasing at a fast pace. However, Ichino et al. (2005) find that in Italy, these
contracts act as a good jumping board towards a permanent job.
On the other hand, there are some OECD countries where the use of fixed-term
contracts has been falling. Although Spain remains to be the OECD country with
the highest share of temporary workers, this share changes from 24% in 1997 to 20%
in 2014. The decline is more apparent after 2006, probably due to the crisis where
temporary workers were the first ones to be laid off. Another counterexample is Den-
mark, where only 7% of the workers hold a temporary contract and this number is
steadily decreasing. According to N¨atti (1993), involuntary temporary employment
is a much lesser issue in Denmark when compared to other European countries prob-
ably due to the labor market conditions, the role of the public sector, labor supply
patterns, and low unemployment rates.
13
17. Figure 3: Self-employment has been on the decile
4.1.2 Self-Employment
For the period studied, self-employment had an average decline (Figure 3). The
share includes agricultural self-employment that to a large extent contributes to this
decline. While some countries had a decline in agricultural self-employment, others
might have experienced a boom in the self-employment in services.
For example, countries like Turkey and Greece that are moving from a more agri-
cultural to a service-based economy account for a large portion of the average decline
in self-employment in the OECD. On the other hand, countries like the Netherlands,
that have moved to a more service abundant economy earlier, note an increase in
self-employment mainly driven by the increase of entrepreneurship in services. By
that token, the number of self-employed in Turkey has declined for about 40% in the
period 1997-2014, whereas the same has increased for almost 35% in the Netherlands.
The Dutch also stand out when it comes to self-employment. Albeit self-employment
notes a general downward trend, the same has been steadily increasing in the Nether-
lands (Figure 4). Nevertheless, not all of the advanced economies have seen a rise in
self-employment. The share of self-employed in Australia and Belgium has declined
for about a third of its value in 1997. On the other hand, in the Czech Republic
and Slovakia, overall self-employment has doubled over the period 1997-2014. This
boom in self-employed could be potentially explained by the systemic transition of
14
18. Figure 4: The Netherlands, a ’riser’ in self-employment
both countries. Prior to transitioning to a capitalistic society, private market re-
strictions blocked the formation of a second economy (Hanley, 2000). The boom in
self-employed in these countries can thus be explained as a utilization of the unused
entrepreneurial capacity in communist times.
Table 2 depicts the per country developments of self-employment. In order to
better grasp in what sector there was a decline, id est increase in the share of self-
employed, sectoral data on self-employment would be a better fit. Due to the in-
avaibility of the data on an international level for the desired time period, this study
utilizes the total number of self-employed per country, disregarding profession.
15
19. Self-Employment Ratesa
by Country, 1997-2014
1997 2014 ∆b
Australia 14.9 10.3 -4.6
Austria 13.8 13.3 -1.5
Belgium 18.6 15.5 -3.1
Czech Republic 12.4 18.1 +5.7
Denmark 9.4 9 -0.4
Finland 14.9 14.1 -0.8
France 10.2 9.6 -0.6
Germany 10.9 11 +0.1
Greece 45.2 35.4 -9.8
Hungary 17.4 11 -6.4
Ireland 20.8 17.4 -3.4
Italy 29.1 24.9 -4.2
Netherlands 12.4 16 +3.6
Norway 8.2 7.2 -1
Portugal 28.9 19.9 -9
Slovak Republic 6.3 15.4 +9.1
Spain 23.5 17.7 5.8
Sweden 10.8 10.3 -0.5
Switzerland 13.9 10 -3.9
Turkey 55.4 34 -21.4
United Kingdom 14.5 15.4 +0.9
a
Self-Employment as a percentage of total employment
b
Change in percentage points
Table 2: Self-Employment shares 1997 and 2014, 21 OECD countries
4.2 Data
The study uses annual data for the share of temporary workers and self-employment
in 21 OECD countries over the period 1997-2014.
Data on the explanatory variables were also extracted from the OECD and the
World Bank database. These include measures of the three types of determinants:
economic, demographic, and institutional. For the economic variables measures of
16
20. GDP growth were extracted 3
. Data on the size of the agricultural, industrial, and
service sector were contracted from the World Bank national accounts data. The
demographics include the share of four age groups as part of the total population. The
sum of exports and imports as a percentage of GDP and share of the household with
access to a personal computer were used as proxies for globalization and technological
change, respectively. Lastly, employment protection legislation and labour unions 4
entered the model as institutional variables.
4.3 Methodology
Most common econometric models for analyzing panel data are the fixed- and the
random-effects model. The fixed-effects model is appropriate specification when a
study is focusing on a specific set of countries and the inference is restricted to the
particular countries observed. However, both the random and the fixed effects models
assume that the error term is uncorrelated over countries and time. The Wooldridge
test for autocorrelation (Wooldridge, 2010) reveals that its null hypothesis of no cor-
relation is strongly rejected in both models. Although in this case the estimators
can still be consistent, the presence of autocorrelation does invalidate the standard
errors. Verbeek (2008) and Baltagi (2008) propose that accounting for autocorre-
lation and heteroskedasticity can be done by exploiting the structure of the error
covariance matrix by using a Feasible Generalized Least Squares (FGLS) method.
However, a small sample size can lead to a poor-finite sample performance of the
FGLS estimator. A major problem with using the FGLS estimator is that to esti-
mate the variance-covariance matrix one must obtain an estimate of each element
in it (i.e., each variance and covariance). One cannot obtain this many estimates
with a small sample size since there are not enough degrees of freedom. Santos and
Barrios (2011) suggest that a large sample includes a time dimension at least 25 and
cross-section dimension size of at least 30, categorizing this study’s panel as rela-
tively small. Here, the fixed-effects method would be a more appropriate estimation
technique. Provided that T is small relative to N, which is the case in this study, the
robust variance matrix estimator is valid in the presence of any heteroskedasticity or
serial correlation (Wooldridge, 2010).
In order to see whether there is an overall time trend that might affect the depen-
3
Unemployment rate was also used as an alternative proxy for the business cycle, however since
the same was insignificant (see Appendix A) and did not add much explanatory power it was not
included in the final model
4
Labor union density was considered as an alternative proxy for institutions. Same as with the
unemployment rate, due to its insignificance (see Appendix A) it was not added in the final model
17
21. dent variable, a Wald test was used after adding year dummies. It is a joint test to see
if the dummies for all years are equal to 0. since the null was rejected at the 1% level,
time-fixed effects were also added to the model. In order to test for heteroskedasticity
in the residuals, a modified Wald statistic for groupwise heteroskedasticity was cal-
culated. The test was indicative of the presence of heteroskedasticity, hence standard
errors were calculated using the White-Huber method.
5 Results
The paper set to investigate the determinants of flexible employment by engaging
into a multivariate analysis entailing two different dependent variables: temporary
employment and self-employment. The simplification of the model is as it follows:
Y it = βitdemographic + δiteconomic + ζitinstitutional + it (1)
Where Y it stands for self- or temporary employment, respective of the model. βit
contains three different coefficients for the three different age groups; δit stands for the
coefficients of GDP growth, trade, technological change, sectors in the economy; while
ζit is the coefficient obtained for EPL, which expresses the difference in employment
protection legislation between regular and temporary contracts.
The dependent variables are expressed as shares of the total employment and
are digits between 0 and 1. The population is divided in four groups: 15-14, 25-
49, 50-64, 65+. The share of the population with an age below 15 is omitted since
these individuals are not eligible to supply labor. The four age groups above were
therefore adjusted to sum up to 1. Trade is expressed through the sum of exports
and imports as share of GDP. The share of households in a country with access to
personal computer was used as a proxy for technological change. EPL represents
the difference between employment protection legislation on regular and temporary
contracts. Detailed definitions of the variables are expressed in C Appendix.
5.1 Model 1: Temporary Employment
Fixed-Effects (FE) analysis was used to investigate the relationship between the
suggested determinants and temporary employment. For the purpose, three models
were identified: a solely demographic model, an extension including the economic
variables, and the final model as described in equation (1). Results of the estimation
are reported in Table 3. The table shows that none of the variables have a significant
influence of temporary employment.The results do not change significantly between
18
22. the three models with the addition of new explanatory variables. Different proxies
for the economic and institutional results were used as a robustness check. Such
results are reported in the Appendix.
The adjusted R2
is 0.16, meaning that variables in the final model can explain
about 16% of the variation in the share of temporary contracts. The fraction of vari-
ance due to the fixed-effects was 0.92, implying that this model cannot be simplified
to a pooled ordinary least squares (OLS) regression.
5.2 Model 2: Self-Employment
Table 4 is a representation of the results obtained for the self-employment model by
using the FE estimation. When compared to the reference group, which is adults
aged 25-49, the shares of the senior group seems to be significantly and positively
associated with the share of self-employment. However, the significant relationship
disappears in the final model, when EPL is added. The results also show that a
larger share of trade is associated with a higher fraction of self-employment, providing
support for the globalization hypothesis. As expected, the size of the agricultural
sector of an economy has a positive association with the share of self-employed.
It shows that a bigger agricultural sector appears to be associated a with a larger
fraction of self-employment. This model scores relatively well and it succeeds in
explaining about 51% of the variation in self-employment.
19
25. 6 Discussion
An initial objective of the study was to identify to what extent are variations in
temporary and self-employment explained by common factors such as economic ones
as opposed to country-specific factors such as institutional ones. For this purpose the
models above incorporate the factors deemed to influence the environment that leads
to these two types of employment. While doing so the study has also controlled for
the demographic structure of societies. The results indicate that when it comes to
temporary employment, common factors do not contribute much to the explanation
in its variation. Such findings are in line with the results obtained by Polavieja (2006)
who reported that the overall distribution of temporary employment does not seem
to be explicable by economic (demand- or supply-side) factors.
Neither did institutions contribute to explaining variations in temporary em-
ployment, contradicting previous findings (Boeri and Garibaldi, 2007, Kahn, 2007,
Polavieja, 2006). However, these studies rely on micro-data, which might be a better
choice for studying the institutional impact on temporary employment. A motiva-
tion for including an institutional variable such as the EPL was the fact that many
European countries liberalized fixed-term contracts in the past decade with the aim
of increasing labor market flexibility. Using a sample of Italian firms Boeri and
Garibaldi (2007) find that temporary contracts accounted for a large component of
the jobs created after the reforms. This study fails to confirm these results in an in-
ternational context. However, one has to be cautious with interpreting the obtained
insignificant effect of institutions on fixed-term contracts as capturing institutional
differences through an arbitrarily harmonized measure, such as the EPL index, is
a very difficult task. Further research with more focus on institutional differences
between countries and their impact on temporary employment is therefore suggested.
Micro-data would be more suitable for such type of an analysis. These findings may
help us to understand why countries have experienced fluctuations in temporary
employment at various pace, direction and intensities, while facing common factors
such as globalization and technological progress. The demographic structure of a
population was not found to significantly affect the share of temporary employment.
The novelty of modeling temporary employment in an international context makes
it difficult to obtain a reference for the present results.
To summarize, it seems that variations in temporary employment cannot be ex-
plained by common factors. This is to say, the fluctuations in the same are country
contingent explaining the diverse trends in countries. While for some the increase in
temps deserves attention, temporary work does not even find its place in the public
debates in other countries.
22
26. Another alternative to permanent employment is self-employment. Here, glob-
alization was found to lead to an increase in this type of employment. A possible
explanation might be that increased interconnectedness between countries provides
access to new markets for the self-employed. This would give support to the en-
treprenurial effect hypothesis, or that individuals enter self-employment due to an
increased potential for entrepreneurship rather than necessity (Thurik et al., 2008).
On the other hand, the relationship between globalization and self-employment could
also be interpreted differently. Increased trade has made it possible for firms to move
production processes to less costly locations (Tytell and Jaumotte, 2008), resulting in
less regular job opportunities. In this case, some individuals might find refuge from
unemployment in becoming self-employed, giving support to the refuge hypothesis
(Thurik et al., 2008). Further research can be done to examine the relationship be-
tween globalization and self-employment and conclude whether the entrepreneurial
effect overrides the refuge effect or vice versa.
Contrary to the findings of Parker and Robson (2004), unemployment rate and
the average rate of tax were not found to significantly affect self-employment (see
appendix). However, it is important to bear in mind that capturing tax incentives
internationally is somewhat burdensome. This study has used the tax on income,
profit and individual gain as a proxy but there are many other ways in which tax
incentives for the self-employed can be created. These results need to be there-
fore interpreted with caution. Isolating the impacts of labor market institutions is
inherently difficult due to identification and measurement issues.
As expected, the incidence of self-employment is associated with the size of the
agricultural sector. The findings can partially explain why self-employment has noted
a general decrease. More societies are moving away from agriculture where a lot
of workers are indeed self-employed. Results are in line with Blanchflower (2000)
who reports a downward trend in self-employment for OECD countries and finds
that the higher the percentage of workers in agriculture, the higher the various self-
employment rates.
Demographics were not found to play a significant role in the final model. How-
ever, in the model excluding EPL, an increase in the share of senior workers seemed
to lead to an increase in self-employment. Such results are not so surprising as older
individuals usually possess more financial and network capital needed to start a busi-
ness. They support the hypothesis that experience does matter for the decision of
entering self-employment, as reported in other studies as well (C¨orvers et al., 2011,
Robinson and Sexton, 1994).
23
27. 6.1 Policy Recommendations
The study has revealed that common factors do little to explain fluctuations in
temporary employment. Neither was employment protection legislation found to
play a significant role. However, in order to determine to what extent is the use
of fixed-term contracts in the scope of public policy further research focusing on
institutions is needed.
Trade and agriculture were found to be significant determinants on the share of
self-employment. When the relationship between globalization and self-employment
was discussed two separate effects were mentioned: the entrepreneurial and the
refuge effect. If a country’s openness leads to new market opportunities for the
self-employed, governments can work towards providing a fertile environment for the
breeding of new entrepreneurs. If, due to diminished labor demand the self-employed
are pushed into this state, the government can act in making this a feasible alterna-
tive to unemployment by, for example, providing tax reliefs or subsidizing startups.
7 Conclusion
Returning to the question at the beginning of this study it is now possible to state
that although there are some common factors influencing flexible employment, the
same are very much country contingent. When it comes to temporary employment,
none of the selected factors seem to matter. The research has also shown that
globalization, as a common factor, has contributed towards an increased share of
self-employed within countries. These findings suggest that in general the era of
interconnectednes has provided self-employment opportunities in the shape of access
to new markets. An other possibility is that globalization also led to resource shifting,
in which case self-employment serves as a refuge from unemployment.
This study is also subject to some limitations. Since the study was limited to
a small sample size, it is not possible to extrapolate the results to labor markets
worldwide. In order to thoroughly investigate the impact of institutions, a different
type of analysis is needed. Future studies could also improve upon this results by
utilizing a larger sample.
The findings do shed light to the burgeoning issue of non-standard labor relations.
Trends of temporary employment are country contingent, and further research is
needed in order to conclude whether such differences can be partially explained
by institutions. This could give further insight to policy makers on how to create
an appropriate environment where healthy labor market flexibility rather than job
polarization will take place. When discussing self-employment, the manner in which
24
28. globalization affects this choice is crucial. Whether in this case the entrepreneurial
effect overrides the refuge effect would be a fruitful area for future studies. Overall,
there is no single way in which the factors at stake can affect flexible employment, but
rather there are different paths that depend on country characteristics and are shaped
by social, political, economic and historical circumstances combined with different
institutional traditions. This can be a promising avenue for further research.
25
29. Appendices
A Robustness Checks
Alternative measures for economics and institutions
In this section a series of robustness checks that adress concerncs about the prox-
ies that might potentially bias the estimates. For these reason specifications with
additional controls are provided. These specification checks do not find evidence that
the preference estimates in Table 1 and 2 are biased.
26
31. B Heteroskedasticity and serial correlation tests
Modified Wald test (Null: no heteroskedasticity)
Model χ2 p-value
1 1779.13∗∗∗ 0.000
2 2278.10∗∗∗ 0.000
Wooldridge test (Null: no autocorrelation)
Model F-statistic p-value
1 23.310 ∗∗∗ 0.0001
2 123.166 ∗∗∗ 0.0000
Pesaran’s test (Null: no cross-sectional dependence)
Model CD-statistic p-value
1 -2.280∗∗ 0.0226
2 -1.625 0.1041
Friedman’s test (Null: no cross-sectional dependence)
Model χ2 p-value
1 5.557 0.9994
2 8.686 0.9863
∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01
Table 6: Summary of the tests
C List of Variables
Dependent
1. Permanent Employment
Permanent workers are employees with paid leave entitlements. Excludes employ-
ees on a fixed term contract or whose expected duration of main job was less than
one year with Seasonal/temporary/fixed contract work supplied as the reason. Other
workers are employees without paid leave entitlements. This is equivalent to employ-
ees who identified themselves as casual and employees without paid leave entitlements
who did not identify as casual. Excludes employees on a fixed term contract or whose
expected duration of main job was less than one year with Seasonal/temporary/fixed
contract work supplied as the reason (in absolute numbers)
2 .Temporary Employment
Temporary worker: The sum of: ’Fixed term contract’ and ’Seasonal workers’. Fixed
term contract workers cover all employees working on a fixed term contract. Seasonal
workers cover all employees whose expected duration of main job was less than one
year with Seasonal/temporary/fixed contract supplied as the reason.
3. Self-employment
Self-employed persons are defined as persons who are the sole owners, or joint own-
ers, of the unincorporated enterprises in which they work. Self-employed persons are
28
32. classified here if they are not also in a paid employment which constitutes their prin-
cipal activity: in that latter case they are classified under employees. Self-employed
persons also include the following categories: unpaid family workers, outworkers and
workers engaged in production undertaken entirely for their own final consumption
or own capital formation, either individually or collectively.
Independent
4.Country
Dataset contains 21 OECD countries. Year
5.Employment Protection on Regular Contracts (EPRC)
On a scale from 0-6, based on 8 items, this variable measures the difficulty of dis-
missing workers on a regular contract
6. Employment Protection on Temporary Contracts (EPT)
Measures the strictness of regulation on the use of fixed-term and temporary work
agency contracts.
7.Employment Protection Legislation (EPL)
Difference between 5 and 6, or the gap between employment protection on fixed-term
and open-ended contracts. 8. Taxes on income, profit, or individual gain
(% GDP)
Tax revenue of these taxes as % of GDP
9. GDP Growth
Annual growth/change of Gross domestic product (GDP) at constant prices, refer-
ing to the volume level of GDP. Constant price estimates of GDP are obtained by
expressing values in terms of a base period.
10. Trade, (Export+Import (% GDP))
A measure of globalization. Calculates how much of the country’s GDP is equivalent
to trade activities.
11. Access to PC
Percentage of all households with access to a computer at home (including PC,
portable, handheld)
12. Youth Demographic variable. Share of population aged 15-24.
13. Adults
Demographic variable. Share of population aged 25-49. Taken as a reference group
in the regressions.
14. Senior
Demographic variable. Share of population aged 50-64.
15. Retired
Demographic variable. Share of population aged 65+.
16.UR
29
33. Unemployment rate for the total labor force
17.Female participation rate, FPR
Female participation rate measured as proportion of women economically active.
18. Union density
Trade union density corresponds to the ratio of wage and salary earners that are
trade union members, divided by the total number of wage and salary earners.
19.Taxes on income, profit, and individual gain
Defined as the taxes levied on the net income (gross income minus allowable tax
reliefs) and capital gains of individuals. This indicator relates to government as a
whole (all government levels) and is measured in percentage both of GDP and of
total taxation.
30
37. Figure 9: The Netherlands among the coutnries with a highest growth in flexible employment
34
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