For over a century, economic activity in almost all industrialized countries shifted from small firms towards larger organizations, until this trend ceased and began to reverse in the mid-1970s. Much of this reversal, at least in the US, reflected a rise in the share of the self-employed in the labour force. In Discussion Paper No. 871, Zoltán Acs, Research Fellow David Audretsch and David Evans identify how the self-employment rate has varied over time and across a range of countries and apply recent theories to account for these variations. Many OECD countries besides the US exhibited an increase in self-employment from the mid-1970s or earlier, although in others including Austria and France it steadily declined throughout the 1970s and 1980s. LDCs for which data are available showed a similar diverse pattern. Within the OECD, self-employment rate ranges from 5.5% in Austria to 17.1% in Italy; in the LDCs considered, self-employment ranged from 3.1% in Botswana to 86.2% in Nepal. These cross-country differences in the level and time-series of self-employment are important to public policy concerning the organization of labour and industrial markets. Some 130 million individuals world-wide are self-employed (excluding agriculture), including a tenth of the OECD countries' labour force. Differences in national time-series for self-employment may also shed light on why its downward trend ceased and even reversed in many cases in the 1970s.

Acs, Audretsch and Evans find that the stage of economic development contributes substantially to the diversity of self-employment rates both across countries and over time. As economies become more capital intensive, the optimal firm size increases, which reduces the returns to entrepreneurship relative to likely earnings from working in an incumbent corporation. The shift from manufacturing to services and the rise in unemployment in many OECD countries in the 1970s more than offset the progress of economic development, however, which produced the observed increases in their self-employment rates. The authors conclude that self-employment will probably resume its long-term downward trend as per capita wealth increases in developed and less developed countries alike.

Why Does the Self-Employment Rate Vary Across Countries and Over Time?
Zoltán J Acs, David B Audretsch and David S Evans

Discussion Paper No. 871, January 1994 (AM)