substantially revised version published as 'Self-employment against employment or unemployment: Markov transitions across the business cycle' in: Eurasian Business Review, 2014, 4 (1), 51-87
Economically active people are either in gainful employment, are unemployed or selfemployed.
We are interested in the dynamics of the transitions between these states across
the business cycle. It is generally perceived that employment or self-employment are
absorbing states. However, innovations, structural changes and business cycles generate
strong adjustment processes that lead to fluctuations between employment and selfemployment,
directly or through the unemployment state. Migrants are more likely to be
sensitive to adjustment pressures than natives, since they have less stable jobs and choose
more often self-employment to avoid periods of unemployment. These issues are
investigated using a huge micro data set generated from 19 waves of the German Socioeconomic
Panel. The findings suggest that the conditional probabilities of entry into selfemployment
are more than twice as high from the status of unemployment as from the status
of employment. Self-employment is also an important channel back to regular employment.
Business cycle effects strongly impact the employment transition matrix, and migrants take a
larger part in the adjustment process. They use self-employment as a mechanism to
circumvent and escape unemployment and to integrate into the host country's labor market.
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