Self-Employment and Labor Market Risks Richard Audoly NO. 1085 JANUARY 2024 Self-Employment and Labor Market Risks Richard Audoly Federal Reserve Bank of New York Staff Reports, no. 1085 January 2024 https://doi.org/10.59576/sr.1085 Abstract I study the labor market risks associated with being self-employed. I document that the self-employed are subject to larger earnings fluctuations than employees and that they frequently transition into unemployment. Given that the self-employed are not eligible to unemployment insurance, I analyze the provision of benefits targeted at these risks using a calibrated search model with (i) precautionary savings, (ii) work opportunities in paid and self-employment, and (iii) skill heterogeneity. This exercise suggests that extending the current U.S. unemployment insurance scheme to the self-employed comes with a clear increase in the transition rate from self-employment to unemployment and an unequal benefits-to-contributions ratio across skill groups. At the calibrated parameters, the self-employed in the middle of the skill distribution lose welfare. JEL classification: J40, J64, J65 Keywords: self-employment, unemployment insurance, earnings dynamics _________________ Audoly: Federal Reserve Bank of New York (email: audolyr@gmail.com). This paper is a revised version of the second chapter of the author’s doctoral dissertation. He thanks his supervisors at University College London, Fabien Postel-Vinay and Jan Eeckhout, for their continual guidance. In addition, he thanks Rory McGee and Ludo Visschers, as well as his examiners, Rasmus Lentz and Wei Cui, for extremely useful feedback. He also thanks workshop and seminar participants at Aarhus University (Sandbjerg Manor), the EEA 2020 Online Conference, UCL, and NHH for their comments. This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s). To view the authors’ disclosure statements, visit https://www.newyorkfed.org/research/staff_reports/sr1085.html. 1IntroductionJob loss ranks amongst the most significant risks that workers face over the course of theircareer. Many countries target sizable transfers to the unemployed in the form of unem-ployment insurance (UI), and a substantial literature aims at characterizing the optimal UIcontract.1 By contrast, while the self-employed account on average for fifteen percent ofemployment across OECD countries, there is little evidence on the labor market risks as-sociated with self-employment.2 Besides, because the majority of the self-employed are noteligible to UI in these countries, traditional social ins...
