Self-employment, educational attainment and employment protection legislation

We analyse how educational attainment and employment protection influence an individual's decision to become self-employed. By altering expected income from dependent employment, employment protection is likely to affect an individual's choice of occupation, although such a link has not been established in the literature so far. We argue that an interaction between an individual's educational attainment and the institution of employment protection exists when it comes to the decision regarding whether to become self-employed. Based on survey data from OECD countries, we find evidence for a negative interaction, and conclude that only after taking this interaction into account can the effect of employment protection and educational attainment on self-employment rates be assessed.

► We use a theoretical model of self-employment and test its implications empirically. ► Our contribution is to allow for an interaction with educational attainment. ► Employment protection reduces self-employment rather for highly educated workers. ► Inclusion of interaction necessary to assess the effect of employment protection.