Self-employment against employment or unemployment: Markov transitions across the business cycle

Abstract

In this paper we study labor market transitions among self-employment, gainful employment, and unemployment across the business cycle comparing the performance of migrants and natives and controlling for individual characteristics. The Markov chain specification we use is an appropriate representation for our employment transition setting. Based on 19 waves of individual panel data the state probabilities for immigrants and Germans are the highest for paid-employment. While for Germans the next higher state is self-employment, for immigrants it is unemployment. The transition probabilities are highest for staying in the current state for both immigrants and natives. Germans are three times more likely to transition to self-employment from unemployment than immigrants. Good or bad times in the economy, however, do not have a significantly differential effect on any of the transitions related to self-employment for immigrants. In contrast, the business cycle affects Germans’ self-employment probabilities. During the upswing, they leave unemployment to go into self-employment; they also leave self-employment to go back to paid-employment. Both immigrants and Germans use self-employment to transition in and out of the other employment states. They especially use it to escape unemployment and this is a relevant and applicable strategy.