On the Substitutability between Paid-employment and Self-employment: Evidence from the Period 1969–2014 in the United States

Abstract

This paper provides estimates of the elasticity of substitution between operational and managerial jobs in the US economy during the years 1969–2014, derived from an aggregate CES production function. Estimating the long-term relationship between (the log of) the aggregate employment/self-employment ratio and (the log of) the returns from paid-employment relative to self-employment and testing for structural breaks, we report different estimates of the elasticity of substitution in each of the two regimes identified. To this end we apply the methodology on instability tests proposed in Kejriwal and Perron (2008, 2010) as well as the cointegration tests developed in Arai and Kurozumi (2007) and Kejriwal (2008). Our results help to understand and interpret one of the most intriguing aspects in the evolution of self-employment rates in developed countries: the reversal of the trend in self-employment rates. Our estimates show that a higher level of development is associated with a greater number of entrepreneurs and smaller firms. Some rationales for understanding the growth of the elasticity between paid-employment and self-employment, including the recent trends in the digital economy, are also suggested.