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Displacement is expected to decrease the reservation wage of self-employment by decreasing earnings in paid employment and increasing the probability of unemployment. This paper examines whether displacement increases the probability of self-employment using propensity score matching on Swedish register-based data. The data include all individuals displaced due to plant closures in 1987 and 1988, and a random sample of 200,000 employed individuals. The results suggest that displacement almost doubles the probability of entering self-employment the year after displacement. A sub-sample analysis indicates that individuals with a potentially worse position on the labor market react more strongly to displacement in terms of entering self-employment.

During the last few decades, extensive worker displacements have become increasingly frequent in western societies. Two main explanations for this phenomenon are technological progress and increasing competition from low wage countries. The process can be viewed as part of Schumpeter's concept of “creative destruction” where old technologies, inventories, skills and equipment become obsolete and hence, out-competed. Although economists may regard worker displacement as part of a necessary structural transformation, it does imply immediate costs for the individual and society as a whole. For instance, a large literature has found earning losses and higher unemployment rates for displaced individuals.1 A commonly argued reason for earning losses is the loss of firm-specific human capital which, according to Hamermesh (1987), also implies significant social costs. When displaced workers reconsider their occupational choice after displacement, both decreased expected earnings in paid employment and a higher probability of unemployment imply a lower reservation wage for self-employment. The probability of self-employment is hence expected to increase as a consequence of displacement. This paper estimates the effect of displacement on self-employment using propensity score matching. The result suggests that displacement almost doubles the probability of entering self-employment the year after displacement. This is indeed a considerable effect which is valid for a large share of the employed working age population. The paper also evaluates the effect of displacement for different sub-samples. The probability of entering self-employment is increased as a consequence of displacement for all sub-samples considered, but the size of the effects differs significantly. The result suggests that individuals with a worse position on the labor market will respond more strongly to displacement in terms of entering self-employment. Those who respond more strongly to a job-loss are in general not the same as those who are most prone to leave employment for self-employment. For income and wealth the relationship is, in fact, reversed; while less wealth and income increases the probability of entering self-employment in response to job-loss, it decreases the probability of leaving employment for self-employment. The effect of displacement is not only interesting in terms of evaluating the consequences for displaced individuals but it also gives general insights about self-employment. As compared to studying unemployed individuals, which are associated with major selection problems, the study of displaced individuals can reveal important mechanisms behind self-employment in general and the response to job-losses in particular. The results do, for instance, contribute to the literature since they give support to the mechanism behind the recession-push hypothesis. The recession-push hypothesis predicts a positive relationship between the unemployment rate and self-employment rate based on that job-less individuals have lower reservation wage of self-employment. Since cross-section studies using the local unemployment rate have typically not given any support to this hypothesis but instead found evidence of an opposite relationship, this is especially valuable. In addition to this contribution, the sub-sample analysis helps us understand the previous inconsistencies in the literature whether individuals who have a less favorable position on the labor market and/or in the society (‘misfits’) or whether high-ability individuals will be overrepresented in the pool of self-employed. The results indicate that in times of unemployment and low economic activity the ‘misfits’ will be overrepresented while in times of prosperity the high-ability individuals will be overrepresented among the self-employed. The data in the paper contain all individuals in Sweden displaced due to plant closures during 1987 and 1988, and a control group consisting of individuals employed in 1986. The information in the data is extensive and includes individual and family background, labor market history as well as regional characteristics. Each individual is followed at least three years prior to and eleven years after displacement. The longitudinal features of the data make it possible to define closure as a process over time and not only defining those leaving the firm at the end as displaced. A further advantage of the data is that they are register-based, which avoids measurement errors associated with survey data. I argue that due to the well defined closure process, the non-selective nature of the event of displacement due to plant closure and the extensiveness of the data, which is fully exploited by the use of propensity score matching, the average treatment effect on the treated of a job-loss is credibly identified. The rest of the paper is organized as follows. Section 2 discusses the theoretical framework and related literature. Section 3 presents the data and the empirical method is briefly described in Section 4. The empirical results are found in Section 5. Finally, Section 6 concludes.

Displacement is assumed to decrease the reservation wage for self-employment by decreasing future earnings and increasing the risk of unemployment. The decrease in the reservation wage is expected to increase the probability of self-employment, since more individuals find it profitable to enter self-employment. Using propensity score matching, the probability of self-employment is estimated to be almost doubled the year after displacement as a consequence of the job-loss. When applying exact matching based on self-employment status prior potential displacement, the effect is even larger. The effect is considerable, especially regarding the favorable state of the labor market during the sample period. The result supports the view that individuals may be pushed into self-employment due to a job-loss as predicted by the recession-push hypothesis. The matching quality is very high. Based on the high matching quality and the favorable point of departure with the non-selective nature of displacement due to plant closure, the well-defined closure process and the extensive pre-displacement information, which is fully exploited by the use of propensity score matching, I argue that the estimated average treatment effect on the treated closely measures the impact of a job-loss on the propensity for self-employment. Studying sub-samples reveals that the effect of displacement on self-employment is positive in all sub-samples considered, but of varying size. Common for several of the groups most prone to enter self-employment in response to displacement is a potentially less favorable position on the labor market. While individuals with a worse position on the labor market seem to enter self-employment in response to displacement to the largest extent, individuals with high level of wealth and high income leaves employment for self-employment most likely. If high-ability individuals are overrepresented among those with large levels wealth and high income, the result explains the inconsistencies in the previous literature whether high-ability individuals or ‘misfits’ will be overrepresented in the pool of self-employed and suggest that the former will be overrepresented in times of low unemployment while the latter will be overrepresented in times of high unemployment and many layoffs. It is hard to give any policy suggestions based on the results. The only lesson that can be learned which might be of interest for policy makers is that threshold effects exist. Whether these effects stem from economic or psychological factors is, however, unclear. It is also unclear whether policy makers want to lower the thresholds based on the result that ‘misfits’ rather than high-ability individuals enter to the largest extent as a response to decreased reservation wage. Previous evidence indicates that having a lot of self-employed with low ability who have entered due to lack of better options is not gainful to the society as a whole (see, for instance, Harding and Bosma, 2006).