Self-Employment in Developing Countries: A Search-Equilibrium Approach

Review of Economic Dynamics, 2020, vol. 35, 1-34

Abstract: This paper develops and estimates a life-cycle on-the-job search model with self-employment that captures labour market stylized facts typical of middle-income developing economies. Workers flow across unemployment, self-employment, formal and informal wage employment. Individuals differ across and within employment sectors in terms of earnings, self-employment ability and transition rates. Counterfactual analysis shows that a flat reduction in payroll taxation increases the share of formal sector workers mainly due to a drop in self-employment. A proportional reduction in payroll taxes improves total welfare by increasing formal sector wages and profits, and allowing for a better allocation of high education workers. Converting to a progressive payroll tax system, equivalent to a flat reduction, is ineffective in reducing informality and leads to a decline in total welfare. (Copyright: Elsevier)

Keywords: Self-employment; Informal sector; On-the-job search; Payroll taxation (search for similar items in EconPapers)
JEL-codes: J23 J46 J48 J64 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

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Software Item: Code and data files for "Self-Employment in Developing Countries: A Search-Equilibrium Approach" (2019)
Working Paper: Online Appendix to "Self-Employment in Developing Countries: A Search-Equilibrium Approach" (2019)
Working Paper: Self Employment in Developing Countries: a Search-Equilibrium Approach (2013)
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DOI: 10.1016/j.red.2019.04.001

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