how is wage employment opposite to entrepreneurship
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Abstract
We construct a simple model incorporating various urban labour market phenomena obtaining in developing economies, and we give a diagrammatic formulation of the market equilibrium. Our initial formulation assumes an integrated labour market and allows for entrepreneurship, self-employment, and wage employment. We then introduce labour market segmentation. In equilibrium voluntary and involuntary self-employment, formal and informal wage employment, and formal and informal entrepreneurship may all coexist. We illustrate the model by an example calibrated on Latin American data, examining individual labour market transitions and implications of education/training and labour market policies.
1. Introduction
Urban labour markets in developing economies exhibit considerable diversity, typically including substantial segments of both voluntary and involuntary self-employment and of formal and informal wage employment. In Latin America and the Caribbean, for example, Perry et al . (2007) find that on average, 24% of urban employment is informal self-employment and 30% is informal wage employment, and each of these segments have significant voluntary and involuntary elements. 1
1 See Fields (2009) for a general discussion of the complexity of labour markets in developing economies and of approaches to modelling them.
The aim of the present article is to formulate a simple model that incorporates all of these labour market states, as well as different types of entrepreneurship, and develop a diagrammatic analysis of market equilibrium. Some recent literature on informality based on search-and-matching theory also incorporates the interaction of several of these labour market states ( Albrecht et al ., 2009 ; Margolis et al. , 2012 ), but is rather complex and relies extensively on simulations to generate results.
In contrast to most of the theoretical literature on informality, we model in detail the supply as well as the demand side of the labour market. 2
2 Galiani and Weinschelbaum (2012) analyse both sides of the market, but their focus, in particular their concern with the effects of social programs, is different from ours.
We assume that each agent can allocate his or her labour to one of three activities: self-employment, wage employment, or entrepreneurship (running a firm and providing wage employment to others). 3
3 In the absence of functioning systems of unemployment insurance and protection from job loss, open unemployment is ‘rarely an option’ for workers in developing economies ( Ghosh, 2012 ).
An agent is characterized in terms of two skills, Y and Z , where, loosely speaking, Y is the ability to produce and sell an output, and Z is managerial ability. Success as a self-employed worker would depend on the amount y of skill Y possessed; but following the Lazear (2005) ‘jack-of-all-trades’ formulation, success as an entrepreneur would depend on applying both skills together, specifically, on the value of min( y , z ), where z is the amount of Z the agent possesses. In wage employment, however, everyone is assumed to be equally able. 4
4 This simplifying assumption is common in the informality literature. Its justification is that across the population we may expect differences in the ability to perform wage work to be relatively small, compared to ability in self-employment and entrepreneurship.