Self-employment, educational attainment and employment protection legislation

► We use a theoretical model of self-employment and test its implications empirically. ► Our contribution is to allow for an interaction with educational attainment. ► Employment protection reduces self-employment rather for highly educated workers. ► Inclusion of interaction necessary to assess the effect of employment protection. a b s t r a c t a r t i c l e i n f o We analyse how educational attainment and employment protection influence an individual's decision to become self-employed. By altering expected income from dependent employment, employment protection is likely to affect an individual's choice of occupation, although such a link has not been established in the literature so far. We argue that an interaction between an individual's educational attainment and the institution of employment protection exists when it comes to the decision regarding whether to become self-employed. Based on survey data from OECD countries, we find evidence for a negative interaction, and conclude that only after taking this interaction into account can the effect of employment protection and educational attainment on self-employment rates be assessed. In a large number of countries, self-employment has become an increasingly important policy instrument for promoting employment (see, for example, the strategy Europe 2020 announced by the European Commission, 2010a; Blanchflower, 2004). Accordingly, various measures for promoting self-employment can be observed, such as the programme of " Self-Employment Assistance " in the US 1 or the start-up grant (" Gründungszuschuss ") funded by the German Federal Agency of Labour 2 to encourage transitions from unemployment into self-employment. 3 Moreover, the economic literature on self-employment that has grown steadily over the last few decades has particularly flourished in recent years. 4 On the one hand, a large number of studies have modelled or estimated microeconomic factors influencing occupational choice, i.e., an individual's choice with regard to self-employment, such as age, gender, marital status, and educational attainment (see Parker, 2009, chapter 4 and the references cited therein). On the other hand, the effects of national institutions, particularly labour market institutions, have been scrutinised with respect to their influence on self-employment rates across countries Union countries are briefly summarised in the report by the European Commission (2010b). Shutt and Sutherland (2003) discuss policy measures proposed to encourage self-employment in the UK. 4 Parker's (2009) book on entrepreneurship constitutes a very comprehensive survey. ☆ We would like to thank the participants of economic workshops in Constance, …