Self-employment in Latin America

Abstract

This paper investigates the determinants of self employment in a sample of six Latin American countries (El Salvador, Costa Rica, Honduras, Ecuador, Paraguay and Jamaica) by the estimation of OLS equations that express the change in the rate of self employment in terms of the rate of: unemployment, salaried employment, participation, economic growth, and remittances. The paper finds that female and male self employment have different responses to participation, unemployment, remittances and economic growth, suggesting the need for particular attention to gender. Particular importance resides in the result that male self employment increases as male unemployment increases, but it does not respond to female unemployment. As well, male self employment decreases when economic growth increases, a response that does not take place in the case of female self employment. Human development and per capita social expenditures represent "lifeguards" that prevent falling into self employment, particularly important to women, and remittances have a stronger "push" effect on women to work in self employment than men. The results indicate that self employment is a means of subsistence in response to unemployment, economic stagnation, and inequality of opportunity and, as such, it is associated with poverty. Given the evidence that poor people die at an earlier age than the non-poor, in both developed and developing countries, the paper finds associations between self employment, poverty and premature death in Latin America. The paper concludes that self employment is a manifestation of a historical framework of inequality of opportunities and low taxation, which gives rise to persistent poverty trap. Low taxation results from income inequality and of the "capture" of government by the high income strata. This is a situation where tax increases are blocked and, in consequence, the public sector does not have sufficient revenues to strengthen equality of opportunity. The results contradict the argument that low taxation is conducive to the creation of jobs; instead, the results demostrate that the lack of sufficient tax revenues have incidence upon the expansion of the informal economy, poverty, and premature death. Low taxation relative to social needs violates the rights to live and work as contained in the Universal Declaration of Human Rights.