Self-employment as economic shock absorber

This extends a comment I made here.


Almost one-fifth of the Australian workforce are in some form of self-employment. The table in the analysis linked to can be seen here. There are 975,000 other business operators plus 1,000,000 independent contractors (previously defined as 'own account workers' or 'owner-managers of unincorporated enterprises') for a total of 1,975,000 (18.5%) out of a workforce of 10.7m. Alternatively, that is about 28% of the private sector workforce.

Commenter Doc Merlin provided the US figures:

As of the last census, we had ~10M completely self employed people. Also roughly 20M firms have no payroll (these people are partially self employed). We have total employment of ~140M people.
This is roughly 7% “complete self employment.” The number of people with partial self employment is probably much, much larger.

The reason why I was interested is that, in a developed economy, high levels of self-employment reduces the effect of economic shocks (since lots of people can take a temporary income hit without losing their jobs), reflects the rise of two-income households (since fluctuations in income can be covered more easily) and the regulatory burden placed on permanent, full-time employment (which imposes costs in wasted resources or blocked opportunities that can be captured by moving to other forms of employment). In Australia, we have a long history of REALLY regulating permanent full-time employment, with some of the highest (and specific) minimum wages in the developed world: though we regulate less than we used to.

More generally, levels of self-employment in an economy tends to be negatively correlated with per capita income (via), as Tino Sanandaji notes in his post:

You get lots of self-employment when transaction costs are too high and the institutional quality low

In Australia, the transaction costs imposed by regulation on ordinary employment is the issue, rather than low institutional quality.

By contrast, I am sceptical about how much wage flexibility in ordinary employment is achievable. There are real contractual and trust issues with cutting base wages to do the same work, as I posted about here. To put it another way: even in a completely unregulated labour market, I suspect there would still be a lot of nominal downward stickiness.

Economist Scott Sumner agrees, responding to my original comment with:

I completely agree. I hope people didn’t infer that I thought wage stickiness was a “problem” that needed to be fixed. I think it is a characteristic of free markets, which must be taken into account when trying to set monetary policy. The ideal monetary policy is one that leads to a situation where most workers don’t need to cut their pay.
There are some government policies that make nominal wages a bit stickier (minimum wages, extended benefits) but I would change those policies for reasons that have nothing to do with business cycles.

Quite.

ADDENDA For a critical, cross-country analysis of self-employment, see here (pdf) (also via).