Ebook Comparing the Earnings of Employees and the Self-Employed
Studying the difference in labor earnings between two groups is a common topic in the labor economics literature. Classic examples include studies of male-female and black-white wage differentials.
Many of these types of studies also examine how different factors (such as human capital) influence the earnings of the different groups. One group that has consistently been ignored by this literature is the self-employed. Most studies that examine the earnings of any group of workers explicitly omit the self-employed from the analysis.
Numerous reasons are given for this exclusion, with one common reason being a general distrust in the earnings information that self-employed individuals report. It is often thought that the self-employed may understate their earnings, or that the conventional definition of earnings does not fit self-employed individuals well. This lack of faith in the measurement of self-employment earnings has hindered comparisons of the earnings distributions of the two groups. While is commonly believed that the earnings of the self-employed are more variable, only a few studies have gone beyond comparing the means of the two distributions.
In this paper we attempt to tackle the measurement issue by constructing alternative measures of self-employed earnings and using these measures when comparing the earnings distributions of the two groups. Furthermore, we estimate earnings regressions for the two groups, using the alternative measures for self-employed individuals. OLS, quantile and censored regression methods are used to provide a comprehensive analysis of the earnings distributions. We then use the results from the regression analysis to determine if any of the theories of earnings differentials explain the differences in earnings between the two groups.
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