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This paper analyzes heterogeneity among the self-employed in 74 developing countries, representing two-thirds of the population of the developing world. After profiling how worker characteristics vary by employment status, it classifies self-employed workers outside agriculture as “successful” or “unsuccessful” entrepreneurs, based on two measures of success: whether the worker is an employer, and whether the worker resides in a non-poor household. Four main findings emerge. First, jobs exhibit a clear pecking order, with household income and worker education highest for employers, followed by wage and salaried employees, non-agricultural own-account workers, non-agricultural unpaid family workers, and finally agricultural workers. Second, a substantial minority of own-account workers reside in non-poor households, suggesting that their profits are often a secondary source of household income. Third, as per capita income increases across countries, the structure of employment shifts rapidly, first out of agriculture into unsuccessful non-agricultural self-employment, and then mainly into non-agricultural wage employment. Finally, roughly one-third of the unsuccessful entrepreneurs share similar characteristics with their successful counterparts, suggesting they have the potential to be successful but face constraints to growth. The authors conclude that although interventions such as access to credit can benefit a substantial portion of the self-employed, effectively targeting the minority of self-employed with higher growth potential is important, particularly in low-income contexts. The results also highlight the potential benefits of policies that facilitate shifts in the nature of work, first from agricultural labor into non-agricultural self-employment, and then into wage and salaried jobs.

Although most workers in developing counties are self-employed, relatively little is known at a broader level about their characteristics and prospects, and how types of employment differ between countries at different levels of economic development. This paper uses a comprehensive set of household surveys to document the heterogeneity of the self-employed, by which we mean both employers and own-account workers. In developing countries, self-employed workers are often classified according to their perceived prospects for growth. A small minority of self-employed are innovative, successful entrepreneurs with further growth potential and ambition (Bennett and Estrin, 2007 and De Soto, 1989). On the other hand, the majority of the self-employed work for themselves and earn little, either because they are rationed out of wage jobs (de Mel et al., 2010, Fields, 1975 and Tokman, 2007) or because they prefer the autonomy and flexibility of self-employment (Maloney, 2004). The less successful self-employed workers, whether self-employed by choice or not, are also heterogeneous. For example, Grimm, Knorringa, and Lay (2012) distinguish between two types of unsuccessful entrepreneurs in several West African cities. The first type has the profile, in terms of age, education, and sector of work, of more successful entrepreneurs, but has yet to acquire significant capital. Although it is impossible to know exactly why these entrepreneurs’ enterprises have failed to grow, the authors assume that their lack of success is partly attributable to personal and environmental constraints, such as inadequate skills and experience, access to capital, or physical infrastructure. The second group of unsuccessful self-employed, on the other hand, does not share the same observed characteristics as successful entrepreneurs, and are therefore assumed to more likely be constrained by their age, education, and sector of work than unobserved features of their skill set or external environment. In this paper, using data from nationally representative micro-level household surveys from almost 100 countries, we examine the characteristics of the self-employed throughout much of the developing world. Building on our profile of the self-employed, we use two admittedly coarse but nonetheless meaningful measures to classify the self-employed as successful: whether a self-employed worker is an employer as opposed to an own-account worker, and whether the self-employed worker lives in a non-poor household. Given data limitations, the analysis is unable to isolate which characteristics or factors cause some self-employed to be successful along these measures. Nonetheless, we can characterize the extent to which the currently unsuccessful self-employed possess basic traits that are correlated with success, which may lead them to have greater potential to become successful. We first examine the characteristics associated with agricultural workers, and of non-agricultural employers, own account workers, non-paid employees, and wage and salary employees. Employers and own-account workers are classified as successful or unsuccessful based on two coarse measures of entrepreneurial success that are present in the data: (i) whether the self-employed are employers (vs. own account workers) and (ii) whether the worker lives in a household with per capita consumption above the $2/day poverty line. While these measures, particularly household per capita consumption, are rough and imperfect measures of the entrepreneur’s success, they convey meaningful information about the economic position of the self-employed. We then measure the percent of the self-employed that are successful, according to these criteria, in each country, and describe the characteristics associated with successful self-employment. Finally, we estimate the percentage of unsuccessful self-employed that share the basic characteristics of their successful counterparts, and therefore can be considered to have greater likelihood to become successful. Throughout the analysis, we are particularly concerned with how the characteristics of the self-employed change at different levels of economic development. We examine this issue by comparing the profile of the self-employed in countries at different levels of per capita GDP. For example, as per capita income increases across countries, how does the proportion of successful, lower-potential, and higher-potential self-employed change? As per capita GDP increases across countries, do more lower-potential self-employed become high-potential or successful entrepreneurs, or are they absorbed into wage employment? Our results have implications for labor market strategies at different stages of countries’ development. For example, if a high proportion of workers are unsuccessful self-employed with little potential to become innovative and successful, policies to promote entrepreneurship, such as microlending or extension services, may be more effective if they are targeted to the narrow set of entrepreneurs with greater potential. Furthermore, if the unsuccessful self-employed are absorbed into wage employment as countries develop, this suggests that the growth of the private wage and salary sector is a key priority for development. On the other hand, if countries develop by creating a larger share of higher-potential or successful entrepreneurs, then broadly targeted investments in human capital and access to finance may be more important. Although there has been research investigating the heterogeneity of the self-employed in several countries (i.e., de Mel et al., 2010, Djankov et al., 2005, Djankov et al., 2006 and Grimm et al., 2012), this is to our knowledge the first analysis that takes a more global perspective on the nature of self-employment across a wide set of middle and low income countries.

We began our analysis of the heterogeneity of labor markets in developing countries by examining the distribution between own account workers, employers, non-paid employees, and wage and salary employees, further divided into agriculture and non-agriculture. In terms of characteristics correlated with the “quality” of jobs, such as household per capita consumption and workers’ education, there is a clear order among different employment categories. Employers are better off than wage and salary employees, who in turn are better off than the own account workers, who in turn are better off than non-paid employees. All categories of non-agricultural workers are better off than agricultural workers. Self-employed workers make up the overwhelming majority of workers in low income countries; in low income countries only about 25% of workers are wage and salary employees (non-agricultural wage and salary employees are only 19% of workers). Our cross-sectional results suggest that as per capita GDP increases, workers transition out of agriculture and self-employment. Within the low income country group, increases in per capita GDP lead to net shifts out of agricultural non-paid employment and own account work and into non-agricultural own account jobs. Then, as countries move from low to lower middle income, employment status evolves as workers shift into wage and salaried work (within both agriculture and non-agriculture). Finally, as countries move from lower middle to upper middle income status, the structural transformation continues as most remaining agriculture workers become non-agricultural wage and salary employees and, to a lesser extent, non-agricultural employers. A key goal of this analysis is to explore the heterogeneity of the self-employed throughout the developing world with respect to their growth potential. One group of self-employed are those with limited growth prospects who are either self-employed by necessity, due to the lack of wage employment opportunities, or have voluntarily chosen to be self-employment over wage employment. In contrast, a higher tier of self-employed consists of innovative, successful entrepreneurs with greater potential, and ambition for growth. Measuring the “success” of existing entrepreneurs provides an indirect measure of the prevalence of these two groups in different contexts. We present estimates of the proportion of the self-employed that are successful using two objective definitions of success: (i) successful self-employed are employers (vs. own account) and (ii) successful self-employed live in households with per capita consumption above the $2/day poverty line. Using the first definition, we estimate that 7% of self-employed workers (3% of all workers) in low and middle income countries are successful. Since many self-employed live in non-poor households, however, many more of the self-employed are successful according to the second definition; using the second definition, therefore, we estimate that 34% of self-employed workers (12% of all workers) are successful. Compared to their less successful counterparts, the successful self-employed are slightly older, much more educated, more likely to work in retail and services, and much less likely to work in agriculture. Men and women who are self-employed are equally likely to be successful, while self-employed who identify themselves as head of household are less likely to be successful than are spouses and other family members. This last characteristic may be because the earnings of self-employed spouses and other family members may represent a secondary source of family income, with the majority of family income coming from a household head who is a wage and salaried employee. Of the unsuccessful non-agricultural self-employed, approximately 36% have characteristics similar to successful entrepreneurs, and may therefore have high potential to become successful entrepreneurs. This percentage is strikingly similar for both definitions of success, and is consistent with existing studies from specific contexts.13 Added together, the self-employed who are successful plus the unsuccessful who have a high potential to be successful represent, on average, between 40% (definition i) and 65% (definition ii) of non-agricultural self-employed workers in low and middle income countries.14 As the per capita income of a country increases, the proportion of the self-employed who are either successful or have high potential for success increases rapidly. For example, while the proportion of the self-employed who are either successful or have high potential for success in low income countries is between 17% and 33% (using definitions i and ii, respectively), for upper middle income countries the proportion in this group increases to between 66% and 94% (again, using definitions i and ii, respectively). This suggests that the self employed in higher income countries are different from the self-employed in low income countries, and is consistent with the conclusion that as per capita income increases those who remain self-employed are more likely to be self-employed by choice rather than necessity. As per capita incomes and levels of education rise, some of the unsuccessful self-employed become successful entrepreneurs. However, most of the unsuccessful self-employed are absorbed into wage and salary work. Our results suggest that the proportion of workers who are successful entrepreneurs or have the potential to be successful entrepreneurs is similar across countries at all income levels (about 10%). This provides some support for the case for narrowly and properly targeted training programs to improve management skills (World Bank, 2013). Although these types of training and other policies can help to remove constraints from a select group of high potential but unsuccessful self-employed, the growth of the private wage and salary sector remains the dominant engine of growth and better jobs.15 This paper presents descriptive findings on the current state of the self-employed in developing countries, and how that changes across countries as per capita GDP increases. These findings are intended to provide context for ongoing research that seeks to understand the factors and interventions that can promote entrepreneurial success. While education is strongly correlated with success in our data, better educated entrepreneurs may be successful for a variety of reasons unrelated to education, such as access to capital, infrastructure, greater wealth, and safety from crime, to name a few. While evaluations of specific interventions related to microfinance, entrepreneurial training, and other potential constraints have contributed important evidence on the relative importance of different constraints to self-employment growth, no consensus has emerged regarding which policy measures should be prioritized. An important open question is the extent to which the disappointing performance of the large numbers of “high-potential” entrepreneurs can be remedied by interventions that provide training, infrastructure improvements, or credit. In other words, to what extent can policies and programs help these entrepreneurs realize the success of their more successful counterparts? Preliminary evidence that entrepreneurship training is more effective for better educated entrepreneurs is merely suggestive.16 If particular interventions are especially effective in relaxing the constraints to these “high-potential entrepreneurs”, these policies could be more broadly targeted in middle-income countries where these types of self-employed are plentiful. Conversely, in this case, targeting entrepreneurship interventions carefully would be more important in low and lower-middle income contexts. Future research can complement this ongoing evaluation agenda, with the help of observational data that combines data on entrepreneurs’ outcomes with data on constraints to their growth such as access to credit, infrastructure, governance, and ambition, to better understand the relative importance of different constraints to entrepreneurial success.