Ebook Self-Employment and Wage Earning in Hungary
This paper examines the earnings determinants of the self-employed and wage earners in Hungary in the mid-1990's. The importance of self-employment is reflected by the numerous studies on it using data from the United States and other advanced market economies. Self-employment is also viewed as important during transition to a market economy in Eastern European countries including Hungary and it is frequently touted as an alternative to regular wage-earning jobs.
Previous literature on self-employment has recognized the bias caused by self-selection into wage/salary earnings jobs or self-employment. Therefore, the earnings equations for both sectors are estimated while correcting the selection bias. However, estimating the earnings equations while correcting bias due to only the selection into wage/salary earnings jobs or self-employment might still yield biased estimates of the earnings equations. This is because the conventional approach may not sufficiently capture the whole selection process.
As well documented in the literature (e.g., Boeri, Burda, and Köllö, 1998, pp. 10-17), the transition from socialist to market oriented economies was quite a bumpy road. During transition, disruptions to the economy typically arise resulting in a substantial decrease in employment. For example, the widespread shutdown of government-owned enterprises destroys jobs. In light of a depressed labor market, some people will not work; others will choose to work and either find jobs in the wage-earnings sector or start their own businesses. These changes contribute to a low employment rate (employment-population ratio).
Table 1 contains several labor market characteristics for selected transition economies and G7 countries. Column 3 contains the percentage of the “working age” population who are not working (those not in the labor force and the unemployed). For the transition economies, the figures range from a low 17 percent for the Czech Republic to a high of 41 percent for Bulgaria. For the four European G7 countries and the U.S., the values range from 27 percent for the U.S. to 44 percent for Italy. These values suggest that selection into working or non-working may be non-trivial and needs to be taken into account, in general. The last three columns of Table 1 also contain several estimates of the percentage of the working population who are self-employed.
This paper pays attention to the fact that the low employment rate in Hungary in mid-1990's cannot be ignored when earnings from self-employment and wage/salary jobs are studied. In estimating earnings equations, it is quite common to account for selection into work/non-work. However, the literature on self-employment typically ignores this selection issue in favor of selection into self-employment/wage work. This paper develops and estimates a model of earnings that accounts for both selection into work/non-work and selection into self-employment/wage work in order to study the earnings of self-employment and wage/salary earning jobs in Hungary in mid-1990's.
We picture a two-stage selection mechanism; people first choose to work or not, then those who have chosen to work decide between self-employment and wage-earning jobs. Below, we refer to the model of estimating earnings equations for the self-employed and wage earners while taking account of these two choices as a modified switching regression model. We refer to the model which only corrects for the choice between self-employment and wage-earning jobs as a standard switching regression model. The methodological contribution of this paper is developing the modified switching regression model by extending the standard switching regression model. We estimate the modified switching regression model using two estimation procedures: Heckman’s two-step method and maximum likelihood (ML). As the results of this paper show, it is important to take account of the decision to work or not work, in addition to the choice between self-employment and wage-earning jobs when studying earning determination among the self-employed and wage earners in Hungary in the mid-1990's.
The rest of the paper is organized as follows. In the next section, we develop the econometrics of the modified switching regression model with choices between working and not working and between self-employment and wage-earning jobs. The data are discussed in Section III. In Section IV we provide estimates of the earnings equation using simple OLS, the standard and our modified switching regression models. The results are also analyzed in this section. Concluding statements are presented in Section V.
Download
PDF Ebook Self-Employment and Wage Earning in Hungary
Posted in :
