Thursday, June 30, 2011

Imports And Exports Lower Domestic Self-Employment: Bad News for Open Economies And Free Trade

From "Self-Employment in the Global Economy" Federal Reserve Boston of Boston, Working Paper 11-5, by Federico J. Díez and Ali K. Ozdagli:
This paper studies the effects of foreign competition on self-employment levels. We begin by pointing out a previously unknown fact: the greater the exposure to foreign competition, the smaller the fraction of self-employed people. This fact holds across very different countries, across relatively similar countries like European Union members, and across industries within the United States. We develop a model where heterogeneous agents select themselves into being either employees or self-employed in the spirit of Lucas (1978). This, in turn, translates into intra-industry firm heterogeneity as in Melitz (2003). Self-employed agents (firms) can also decide to enter into the export markets, subject to fixed and variable trade costs. The model delivers three basic predictions: (1) domestic self-employment increases with the trade costs of exporting from a foreign country to the home country, (2) domestic self-employment increases with the trade costs of exporting to the foreign country, and (3) higher levels of self-employment are associated with a lower fraction of exporting firms. Our empirical work on inter-industry data for the United States confirms these predictions of the model.
From the paper:
We start by unveiling a previously unknown fact -- namely, that the rate of self-employment in an economy (or sector) is negatively affected by the economy's (sector's) degree of openness, measured either as trade costs or as the ratio of exports and imports to GDP. That is, economies (sectors) that are more exposed to foreign competition show lower levels of self-employment.
Read the complete paper here.

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