Self-employment and earning inequality

Abstract

The present study attempts to explain the difference in observed earning inequality between self-employment and wage-employment in Switzerland in 1992, 1995 and 2000. We use several measures of inequality in order both to determine the factors affecting income dispersion in the two groups and to identify the variables that drive the earning inequality differential. Thus, we make use of discrete decomposition techniques and of a regression-based method. The latter allows us to introduce a selection term in our decompositions which is of crucial importance in the case of self-employment. Our results indicate that education- and age-related variables, like work experience and tenure, are the most important factors explaining the inequality level in both groups. The importance of these factors seems, however, to be larger in the wage-employment sector. The reason may lie in the process of selection into selfemployment rather than in the differences in the returns to characteristics between the two sectors.