MODELING THE INCIDENCE OF SELF-EMPLOYMENT: INDIVIDUAL AND EMPLOYMENT TYPE HETEROGENEITY SARAH BROWN, LISA FARRELL and MARK N. HARRIS ∗ Modeling the incidence of self-employment has traditionally proved problematic. Although the supply-side characteristics of the self-employed are well documented, we argue that the literature has neglected demand-side aspects. We explore the determinants of self-employment using the U.S. Survey of Consumer Finances. We present results from an econometric framework that allows us to model, separately and simultaneously, the influences of individual heterogeneity (i.e., supply-side factors) and employment type heterogeneity (i.e., demand-side factors) on the probability of self- employment. Our findings suggest that while individual characteristics are important determinants of self-employment, there are factors specific to the type of employment that influence self-employment. (JEL J23, J33, C25, C10) I. INTRODUCTION AND BACKGROUND Over the last three decades, there has been considerable interest among both academics and policymakers in the determinants of self- employment, as well as business ownership more generally. Such interest is not surprising given that the self-employed have emerged as an important group within the labor force in many countries (Le 1999). Furthermore, self- employment and entrepreneurship have been regarded as avenues for raising employment with self-employees and entrepreneurs creating their own jobs and potentially creating jobs for others, thereby serving to alleviate unemploy- ment and poverty. A number of approaches have been developed to explore the determinants of self-employment, ∗ The authors are grateful to the U.S. Federal Reserve Board for supplying the Survey of Consumer Finances, 1989, 1992, 1995, 1998, 2001, and 2004. The authors are especially grateful to two anonymous referees for their valuable comments, to participants at the Work and Pensions Economics Group Annual Conference at the University of Sheffield July 2008, and to Aurora Ortiz for her excellent research assistance. The normal disclaimer applies. Brown: Professor of Economics, Department of Economics, University of Sheffield, 9 Mappin Street, Sheffield S1 4DT. Phone +44(0)114 2223404, Fax +44(0)114 2223458, E-mail sarah.brown@sheffield.ac.uk Farrell: Professor, Discipline Head, Economics, School of Economics, Finance and Marketing, RMIT University, Melbourne, Australia. Phone +613 9925 5891, E-mail lisa.farrell@rmit.edu.au Harris: Associate Professor, Department of Econometrics and Business Statistics, Monash University, Australia. Phone +613 9905 9414, Fax +613 9905 5474, E-mail mark.harris@monash.edu emphasizing to varying degrees sociological, psychological, and economic influences. Recent literature has explored the choice between self- employment and paid employment (see Earle and Sakova 2000), whereby individuals com- pare the utility derived from each sector and then decide which sector to enter. The existing liter- ature has focused on the role of pull and push factors, where the former relates to factors which encourage individuals to voluntarily choose self-employment (such as independence and flexibility), whereas the latter relates to a lack of alternatives because of, for example, labor market conditions. For example, unemployment push and pull factors play an important role with displaced workers being pushed, or pulled, into self-employment by supply-side consider- ations (Taylor 1996). There has been a focus on the attributes of the self-employed, con- centrating on characteristics such as gender, ethnicity, education, marital status, age, and number of children as well as financial factors ABBREVIATIONS AIC: Akaike’s Information Criterion BIC: Bayesian Information Criterion CAIC: Corrected AIC IIA: Independence of (from) Irrelevant Alternatives LR: Likelihood Ratio MNL: Multinomial Logit NILF: Not in Labor Force SCF: Survey of Consumer Finances 605 Contemporary Economic Policy (ISSN 1465-7287) Vol. 29, No. 4, October 2011, 605–619 Online Early publication September 12, 2010 doi:10.1111/j.1465-7287.2010.00232.x  2010 Western Economic Association International