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  1. 1. Máster en Docencia Universitaria Presentaciones avanzadas para las aulas Rocío Arteaga Sánchez Jesús Iglesias Garrido Concepción Román Dr. D. Francisco Pavón Rabasco
  2. 2. Dependent Self-employment as a way to evade Employment Protection Legislation SERG -Spanish Entrepreneurship Research Group- Universidad de Huelva XI Reunión de Economía Mundial
  3. 3. Outline <ul><li>MOTIVATION </li></ul><ul><li>OBJECTIVES </li></ul><ul><li>HYPOTHESES </li></ul><ul><li>DATA </li></ul><ul><li>ECONOMETRIC FRAMEWORK </li></ul><ul><li>RESULTS </li></ul><ul><li>CONCLUSIONS </li></ul>
  4. 4. Motivation <ul><li>Relationship between self-employment and EPL strictness is a matter of controversy (Parker 2007; Audretsch et al. 2007). </li></ul><ul><li>Arguments suggesting the existence of a negative relationship: </li></ul><ul><ul><li>EPL imposes higher sunk costs for self-employed workers who decide to take on employees. </li></ul></ul><ul><ul><li>EPL alters the relative valuation between salaried-work and self-employment. </li></ul></ul><ul><li>But also, a positive relationship may be considered: </li></ul><ul><li>EPL and schemes oriented to encourage people to start business </li></ul><ul><li>Mutual agreements between employers and employees </li></ul><ul><li>“ Dependent” self-employment transitions </li></ul>
  5. 5. Objectives <ul><li>Do employers in countries with relatively more stringent EPL tend to evade these regulations making use of self-employment promotion policies? </li></ul><ul><li>Which paid-employees are more likely to accept agreements with their employers and to become “dependent” self-employed? </li></ul><ul><li>What are the differences between those employees becoming “dependent” self-employed and those becoming “true” self-employed? </li></ul><ul><li>How business cycle and institutional environment affect “dependent” self-employment phenomenon? </li></ul>
  6. 6. Hypothesis 1 Mutually agreements between employers and employees Employment protection legislation strictness + Self-employment promotion policies Occupational choice distortion: “Dependent” self-employment transitions Employers evade the more onerous elements of the EPL Employees take advantage of incentives and tax allowances
  7. 7. Hypothesis 2 Counter-cyclical transitions from PE to “dependent” SE Pro-cyclical transitions from PE to “true” SE Business cycle effects: Recession push-hypothesis Prosperity pull- hypothesis
  8. 8. Hypothesis 3 <ul><li>The potential value of the severance payment might be another incentive to arrange a transition from paid-employment to self-employment. </li></ul><ul><li>Employer and employee can simulate a dismissal in order to receive an additional compensation remaining a short term in the unemployment state before to complete the transition to self-employment. </li></ul>Self-employment Unemployment Paid-employment
  9. 9. Data <ul><li>European Community Household Panel </li></ul><ul><li>1994-2001 period </li></ul><ul><li>Information directly comparable </li></ul><ul><li>Men and women aged 21 to 59 </li></ul><ul><li>Workers in the agricultural sector are excluded </li></ul><ul><li>Full-time workers </li></ul><ul><li>Incomes are corrected by: </li></ul><ul><ul><li>Purchasing Power Parity (across countries) </li></ul></ul><ul><ul><li>Harmonised Consumer Price Index (across time) </li></ul></ul><ul><li>Standardised unemployment rates </li></ul>
  10. 10. Definition “dependent” vs. “true” self-employment <ul><li>Individuals in our dataset are asked: </li></ul><ul><li>Main activity status (PE, SE, unemployed, retired...) </li></ul><ul><li>Year of start of current job </li></ul><ul><li>From this information we define: </li></ul><ul><li>“ True” self-employment transitions (TSE) </li></ul><ul><ul><li>PE in t-1 switching to SE in t and declaring t as starting year of current job </li></ul></ul><ul><li>“ Dependent” self-employment transitions (DSE) </li></ul><ul><ul><li>PE in t-1 switching to SE in t and declaring t- x as starting year of current job -while they still were PE - </li></ul></ul>
  11. 11. <ul><li>Standard Binary Logit Models </li></ul><ul><li>(1) (2) </li></ul><ul><li>(3) (4) </li></ul><ul><li>X i,t-1 Individual characteristics and economic conditions in period t-1 </li></ul><ul><li>β Associated vector of coefficients to be estimated </li></ul><ul><li>u i Time-invariant unobserved heterogeneity (person-specific effect) </li></ul><ul><li>ε i,t Random error term (not person-specific unobserved variables) </li></ul><ul><li>F(.) follows a logit distribution </li></ul>Econometric Framework
  12. 12. Results (III) EXERCISE (1) EXERCISE (2) EXERCISE (3) EXERCISE (4) Prob [SE t | PE t-1 ] Prob [TSE t | PE t-1 ] Prob [DSE t | PE t-1 ] Prob [DSE t (vs. TSE t )] Variables Marg. eff. t-stat. Marg. eff. t-stat. Marg. eff. t-stat. Marg. eff. t-stat. Incomes Dwelling owner 1.93% 0.3 -7.73% -0.89 16.05% 1.68* 12.21% 1.62* Capital & property incomes (1 lag)(x e-3) 2.71% 3.58*** 1.92% 1.58 3.07% 3.23*** 2.15% 1.62* Work incomes (x e-2) 0.1% 0.29 0.33% 0.74 0.01% 0.01 -0.53% -0.88 Business cycle Unemployment rate 1.33% 0.8 -4.42% -1.82* 7.63% 3.12*** 6.75% 3.13*** Country Austria (5) -31.54% -1.74* -41.11% -1.84* -33.44% -1.16 20.6% 0.66 Belgium (5) -52.81% -4.72*** -37.28% -2.04** -79.21% -5.75*** -38.18% -1.7* Denmark (5) -16.48% -0.87 -24.61% -1.05 -11.12% -0.35 12.46% 0.44 Finland (5) 27.34% 1.61 -1.02% -0.05 67.53% 2.2** 38.18% 2.47*** Germany (5) -56.4% -5.08*** -43.68% -2.45*** -78.92% -5.26*** -19.79% -0.99 Italy (5) 63.65% 3.45*** 27.6% 1.22 127.22% 3.54*** 44.95% 3.37*** Netherlands (5) -44.98% -2.96*** -69.32% -3.52*** 1.45% 0.04 59.54% 2.41** Portugal (5) 24.95% 1.09 3.55% 0.13 70.22% 1.61 41.57% 1.81* United Kingdom (5) -36.95% -2.69*** -3.9% -0.16 -115.3% -9.47*** -85.31% -6.88*** Reference categories : (5) Spain Log likelihood -7442.81 -4798.64 -3446.73 -815.72
  13. 13. Labour market institutions variables (I) <ul><li>Regular Employment Protection Legislation (OECD ) </li></ul><ul><ul><li>Procedural inconveniences </li></ul></ul><ul><ul><li>Notice and severance pay for no-fault individual dismissals  </li></ul></ul><ul><ul><li>Difficulty of dismissal </li></ul></ul><ul><li>Temporary Employment Protection Legislation (OECD) </li></ul><ul><ul><li>Fixed-term contracts </li></ul></ul><ul><ul><li>Temporary Work Agency Employment </li></ul></ul><ul><li>Social Security Laws Index (Botero et al. 2004) </li></ul><ul><ul><li>Old age, disability and death benefits </li></ul></ul><ul><ul><li>Sickness and health benefits  </li></ul></ul><ul><ul><li>Unemployment benefits   </li></ul></ul>
  14. 14. Labour market institutions variables (II) <ul><li>Expenditure on Active Labour Market Policies as % of GDP(OECD) </li></ul><ul><ul><li>Public Employment Services and administration </li></ul></ul><ul><ul><li>Labour market training </li></ul></ul><ul><ul><li>Youth measures </li></ul></ul><ul><ul><li>Subsidised employment </li></ul></ul><ul><ul><li>Measures for the disable </li></ul></ul><ul><li>Potential Severance Payment (OECD Employment Outlook 1999, ch. 2) </li></ul><ul><ul><li>Severance pay for individual dismissal of a regular employee with tenure beyond any trial period </li></ul></ul><ul><ul><li>Personal grounds or economic redundancy but without fault </li></ul></ul><ul><ul><li>Information based on legal regulation, but also on averages found in collective agreements or individual employment contracts. </li></ul></ul><ul><ul><li>Employment duration, salary, type of contract, age. </li></ul></ul>
  15. 15. Results (IV) EXERCISE (1) EXERCISE (2) EXERCISE (3) EXERCISE (4) Prob [SE t | PE t-1 ] Prob [TSE t | PE t-1 ] Prob [DSE t | PE t-1 ] Prob [DSE t (vs. TSE t )] # observations 157016 156293 156195 1544 # transitions 1544 821 723 723 vs. 821 Predicted probability 0.00463 0.00257 0.00129 0.45965 Variables Marg. eff. t-stat. Marg. eff. t-stat. Marg. eff. t-stat. Marg. eff. t-stat. Business cycle Unemployment rate -0.36% -0.43 -4.43% -3.09*** 6.11% 4.9*** 5.32% 3.99*** Labour Market Institutions EPL index for regular employment 0.86% 0.26 -8.09% -1.79* 32.56% 5.55*** 21.48% 4.17*** EPL index for temporary employment 11.94% 4.52*** 6.95% 1.75* 26.21% 6.78*** 10.57% 3.01*** Social Security Laws index 573.93% 9.06*** 362.46% 3.42*** 973.91% 9.18*** 344.93% 3.49*** Expenditure on ALMP as % of GDP -7.67% -1 -32.15% -2.9*** 74.04% 4.97*** 57.28% 4.45*** Log likelihood -7472.76 -4810.06 -3486.88 -832.45
  16. 16. Results (V) EXERCISE (1) EXERCISE (2) EXERCISE (3) EXERCISE (4) Prob [SE t | PE t-1 ] Prob [TSE t | PE t-1 ] Prob [DSE t | PE t-1 ] Prob [DSE t (vs. TSE t )] # observations 157016 156293 156195 1544 # transitions 1544 821 723 723 vs. 821 Predicted probability 0.00462 0.00261 0.00140 0.46854 Variables Marg. eff. t-stat. Marg. eff. t-stat. Marg. eff. t-stat. Marg. eff. t-stat. Business cycle Unemployment rate -0.44% -0.56 -4.01% -3.02*** 4.12% 3.41*** 3.89% 3.35*** Labour Market Institutions EPL index for temporary employment 12.53% 4.81*** 7.27% 1.88* 24.01% 6.34*** 9.25% 2.57*** Social Security Laws index 574.59% 9.08*** 370.47% 3.47*** 888.7% 8.57*** 326.70% 3.36*** Expenditure on ALMP as % of GDP -8.49% -1.15 -30.56% -2.81*** 35.4% 2.82*** 40.03% 3.64*** Potential severance payment (x e-3) -0.21% -0.64 -1.99% -2.85*** 0.89% 2.83*** 1.68% 3.36*** Log likelihood -7472.58 -4804.81 -3498.80 -838.04
  17. 17. Conclusions <ul><li>WHAT WE OBSERVE … </li></ul><ul><li>EPL strictness and ALMP increase transitions PE -> DSE </li></ul><ul><li>Two opposite business cycle effects on transitions to TSE and DSE </li></ul><ul><li>Severance payment increases the opportunity cost of SE </li></ul><ul><li>OPEN QUESTIONS </li></ul><ul><li>Are policies aimed to encourage SE well designed? </li></ul><ul><li>Should effective measures to detect and combat DSE be designed? </li></ul>
  18. 18. Dependent Self-employment as a way to evade Employment Protection Legislation Thanks for your attention!

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