Structural Change, Financial Frictions, and Selection into Entrepreneurship
Financial frictions adversely affect productivity by discouraging entrepreneurship, which is often measured by the self-employed. We argue that it is essential to divide the self-employed into employers and own-account workers (self-employed without employees) when studying this question. Using micro data for 77 countries from all income levels, we show that employers' labor shares are increasing with GDP per capita, whereas own-account employment is decreasing. We also find an almost universally negative selection on education into own-account status relative to wage workers and positive selection into employers. To quantitatively match these facts, we build an occupational choice model with cross-country differences in financial development and skill-biased productivity levels. Our model predicts an average of 19% output gains in low-income countries from removing financial frictions. In contrast, an alternative model with skill-neutral technological change cannot match the high own-account employment share in low-income countries, thus overestimating the output gains by 13 percentage points.
Jie Ren is currently a 4th year PhD Candidate in Economics at National University of Singapore. Her research interests are in Macroeconomics, Growth and Development. She was awarded the Goh Keng Swee PhD Scholarship (NUS) and the Research Scholarship (NUS). She has been working on topics including marriage, structural change, financial frictions and entrepreneurship with her supervisor Ying Feng.