Executive summary

This paper asks whether the nature of self-employment changed between the 1990s and the 2000s. This question is important not only because of the large numbers of Canadians who are engaged in self-employment today and who have been engaged in self-employment in the past, but also because it contributes to the understanding of why the productivity performance of the unincorporated self-employment sector was poor in the 1990s relative to the 2000s.

This paper examines how the nature of self-employment may have changed, by comparing the labour market transition rates for males (between non-employment, paid employment, own-account self-employment, and self-employment with paid help) in two panels of the Survey of Labour and Income Dynamics (SLID): the 1993-1998 panel and the 2002-2007 panel. An econometric model is then estimated for the purpose of characterizing the change further.

How did the labour market flows in and out of self-employment change between the 1990s and the 2000s?

Compared to the self-employed in the 1990s, the self-employed in the 2000s were much less likely to move to paid employment.

The change in the transition rates is consistent with the argument that many individuals were using self-employment as a stopgap in the 1990s. Instead of persisting in self-employment, the self-employed in the 1990s were more likely to move back into paid employment when opportunities presented themselves. Moreover, fewer paid-employed moved to self-employment in the 2000s than in the 1990s.

What is behind the increased persistence in self-employment?

An econometric model is estimated in order to investigate the increased persistence in self-employment. The model attributes the increased persistence to greater state dependence. Changes in demographics or in the industrial and occupational structure contributed little to the increased persistence. State dependence can be the result of a number of factors. High job search costs may prevent individuals from looking for jobs and moving into paid employment from other employment states, such as self-employment. Sunk costs associated with starting a business (e.g., the purchase of specialized equipment) may impede movement back into paid employment. The building of skills through learning-by-doing can lead to greater state dependence, if skills learned in self-employment cannot be easily transferred to paid employment. Additional research is needed in order to understand better the cause of the increased state dependence between the 1990s and the 2000s.

What are the implications for productivity?

The more transitory nature of self-employment in the 1990s indicates that the businesses started by the newly self-employed at that time did not last long. Previous literature suggests that, on average, entrants are not as productive as incumbents and that it takes time for the productivity of entrants to improve. The fact that there were more newly self-employed in the 1990s and that their businesses did not survive long is likely related to the poorer productivity performance of the self-employment sector in the 1990s compared to that of the self-employment sector in the 2000s.