Working Paper: CEPR ID: DP4754
Authors: Amelie Constant; Klaus F. Zimmermann
Abstract: 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.
Keywords: business cycle; entrepreneurship; Markov chain analysis; migration; self-employment
JEL Codes: E32; J23; J61; M13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| GNP growth rates (O57) | employment transitions (J63) |
| unemployment (J64) | self-employment entry (L26) |
| business cycle effects (E32) | employment transition matrix (J68) |
| self-employment (L26) | escape unemployment (J65) |
| migrants (F22) | self-employment during downturns (J23) |