SELF‐EMPLOYMENT AND LABOR MARKET RISKS

Abstract

I study the labor market risks associated with self‐employment. I document that the self‐employed are subject to larger earnings fluctuations than employees and frequently transition into unemployment. I analyze the provision of benefits targeted at these risks using a calibrated search model with (i) precautionary savings, (ii) work opportunities in paid‐ and self‐employment, and (iii) skill heterogeneity. Extending the U.S. unemployment insurance scheme to the self‐employed increases the transition rate from self‐employment to unemployment and yields an unequal benefits to contributions ratio across skill groups. At the calibrated parameters, the self‐employed in the middle of the skill distribution lose welfare.