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The self-employment rate has decreased in Japan. This paper examines reasons why working householders aged below 55 avoid self-employment, focusing on age, location, and gender effects. Increasing age and living in local areas encourage householders to be self-employed. Between 1989 and 1994, however, both the age and local effects weakened, while the positions of self-employed females were not improved. We estimate earnings functions for self-employed workers and employees, controlling sample selection bias. The decline in real income of self-employed workers relative to employees particularly in metropolitan areas was more likely to prevent over-35 householders from being self-employed. J. Japan. Int. Econ., March 2002, 16(1) pp. 73–91. Faculty of Economics, Gakushuin University, 1-5-1 Mejiro Toshima-ku, Tokyo 171-8588, Faculty of Economic, Tokyo Metropolitan University, 1-1 Minami-Osawa, Hachioji-city, Tokyo 192-0397, Japan. © 2002 Elsevier Science (USA).

This paper examines the reasons for the decrease in the number of self-employed persons in Japan. In most developed countries, as well as in Japan, the movement in self-employment has been an important issue, because it closely relates to the distribution of available job opportunities. Since the seminal papers by Rees and Shah (1986) and Blau (1987) pointed out that the self-employment rate in the United States had begun to rise in the 1970s, many researchers have wrestled with the problem of the movement of the self-employed. OECD (2000) featured the steady growth of self-employment during the 1980s and 1990s in most OECD countries, calling this phenomenon “the partial renaissance of selfemployment.” As to causes, they emphasized not only the growth in the industrial sector of business and community services but also the increasing proportion of women.Although the self-employed in most OECD countries have enjoyed their prosperity, the self-employment rate in Japan has continued to decline since the end of 1970s. Only in Japan, Denmark, and France have self-employment rates decreased both in the 1980s and in the 1990s (OECD, 2000, pp. 159–160). The rate of self-employment increased substantially in Great Britain in the 1980s, giving rise to a debate over whether the increase was because of market forces or government policies promoting self-employment. In Japan, by contrast, it is important to understand why self-employment has decreased.What is the main reason for decreasing self-employment in Japan? This paper focuses on the choice of self-employment among working householders aged below 55 years and clarifies the reasons for a decline in self-employment in the first half of the 1990s. Using cross-sectional micro data, we examine the extent to which business location and householders’ age and gender affect the selection of self-employment and the income of the self-employed. This paper is organized as follows. Section II shows the basic data for selfemployment in Japan and surveys previous studies on the determination of selfemployment. Section III explains the data content and illustrates the empirical model used in our estimates. Section IV presents the estimated results of the selfemployment selection model and the earnings function, controlling for selection bias. Section V concludes.

This paper has examined the reason for the decline in self-employment in Japan in the first half of the 1990s. The main empirical findings are as follows.From 1989 to 1994, the probability of being self-employed decreased greatly among middle-aged workers in both metropolitan and local areas. In particular, the decline was greater in local areas, where householders had been more likely than those in metropolitan areas to choose self-employment. Controlling for the sample selection bias, we estimated the earnings functions for both self-employedworkers and employees. The real income of middle-aged self-employed workers shrank in metropolitan areas in the period. Because of a subtle change in the wage profile of employees, the relative decline in self-employed earnings among middle-aged workers was consistent with their reduction of self-employment choice, especially in metropolitan areas. Compared with the older self-employed, on the other hand, the relative income of the young self-employed increased. If technological innovations or a growing service industry may improve the positions of young self-employed workers, policies to promote these will be desirable to decrease the monetary and informational obstacles that young people confront when opening their businesses. In contrast with metropolitan areas, the profitability of the middle-aged selfemployed was not much less than that of employees in local areas. Some factors such as the difficulty of inheriting a business or institutional changes could be responsible for a substantial decline in self-employment growth in local areas instead of a widening income gap. In addition, the environment of female selfemployed did not improve in the first half of the 1990s. Compared with other OECD countries, the small improvement of female entrepreneurs could be one important reason for declining self-employment in Japan. The most important point to be made in this paper is that data constraints prevent us from directly studying the opening and closure of self-employed businesses.Using flow data on occupational choices, future research should examine how structural changes in the labor and financial markets have influenced births and deaths of self-employed businesses in Japan.