Essays on occupational choice

Risk aversion may drive some individuals to choose dual work—part-time employment parallel to an entrepreneurial venture—to insure against variable firm income. In two chapters, this dissertation analyzes the importance of dual work as a stepping-stone to entrepreneurship. In Chapter 1 I take a structural approach and build my analysis on a dynamic stochastic general equilibrium framework. In Chapter 2 I take a reduced form approach and estimate a nonlinear conditional probability model to analyze transitions into entrepreneurship. Both chapters rely on data from the 2014 Survey of Income and Program Participation for calibration and estimation.

Chapter 1 analyzes the effects of two compensation frictions: (i) non-linear labor remuneration that penalizes part-time work relative to full-time, particularly in the form of lower benefits; and (ii) rigid employment contracts that restrict access to the dual sector. The results suggest that both frictions have similar effects on occupational mobility. A decrease in the compensation penalty to part-time work, or an increase in employment flexibility, increases entrepreneurial undertakings in the economy, increases aggregate welfare, reduces wealth inequality, and shifts the wealth distribution to the right.

Chapter 2 analyzes the transition probabilities into self-employment across different occupational categories. I estimate several dynamic binary response models, using a probit link function, and include controls for time and individual effects as well as occupation based on the standard occupational classification (SOC) codes. Measures are taken to remediate issues with incidental parameters stemming from using a small number of periods relative to the number of individuals as well as the initial conditions problem resulting from the dynamic structure. The results suggest that dual workers are more likely than employees to transition into self-employment. Increased household wealth results in a decreased likelihood to become self-employed among dual workers, suggesting that low wealth individuals are more likely pursuing dual work for risk mitigation. Furthermore, increased monthly income results in a decreased likelihood to become self-employed among dual workers. This can be interpreted to mean that a low current income represents a lower opportunity cost for switching into self-employment.