Self-Employment and Development

Juan Herreño and Sergio Ocampo

No 20209, University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers from University of Western Ontario, Centre for Human Capital and Productivity (CHCP)

Abstract: Selection into self-employment among the poor is dominated by subsistence concerns, which leads to high levels of unproductive self-employment in developing countries. We incorporate this view into an otherwise benchmark macro-development model by allowing for labor frictions. Standard models that rely only on financial frictions are at odds with crucial features of the data, including large self-employment rates among the poor and the response of labor markets after well-identified labor demand shocks. We study the efficacy of a wide range of development policies on occupational choices, prices, and productivity. We find that providing unemployment benefits improves selection into self-employment, increasing total-factor productivity (TFP). Self-employment grants and unconditional transfers lower TFP by making self-employment more attractive to low-productivity individuals. Finally, financial reforms that improve access to credit succeed in raising productivity, but they do not address the subsistence concerns of poor individuals. Self-employment is still concentrated among the poor after the reforms take place.

Keywords: self-employment; unemployment; development; micro-finance (search for similar items in EconPapers)
Date: 2020
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