Developing countries have more self-employment and less wage employment than developed countries. Along these lines, this paper documents two interesting facts. First, self-employed and wage-employed have distinguishable occupational distributions in low-income countries, with the self-employed concentrating on home-production related occupations. Second, the decrease in home-production-related self-employment is the primary driver of the decline in the self-employment rate along the development path. Given the enormous amount of the self-employed in developing countries, it is essential to understand how policies affect the size of the wage and the self-employment sectors. This paper builds a simple heterogeneous agent model with occupational choice. My innovation is to assume that the self-employed and the wage employed produce different goods, in line with the empirics. The model calibrated to Tanzania shows that with a realistic elasticity of substitution between goods produced by two sectors, occupational choice in response to corporate tax cuts is only 1/3 as elastic as in a case with very high substitutability. The rationale is that when the wage and self-employment sectors provide goods that are harder to substitute, a reduction in the supply of home production substitutes increases its price, making self-employment more attractive, thus weakening the effectiveness of those policies.
STEG Working Paper Series
• Research Theme 2: Labour, Home Production, and Structural Transformation at the Level of the Household
Policy Reforms and Self-Employment in Developing Countries: A Multi-Good Approach
Related content
