Self-employment and labour market transitions: a multiple state model

In this paper we estimate a multiple state transition model for the UK describing transitions in and out three possible labour market states: self-employment, paid employment and unemployment. This enables us to assess the effect of demographic characteristics as well as time changing economics conditions on the probabilities of exiting and entering each different state. A reduced form model is estimated allowing for unobservable individual heterogeneity. The results are consistent with the hypothesis of a deterioration of the labour market conditions generating an increase in the self-employment rates in adverse economic conditions. However unemployment duration generates a loss on human capital that reduce the probabilities of switching to self-employment. It appears also that -family background and education play and important role in determining the transition probabilities. Medium level educated individuals are the most likely to become self-employed