Self-employment and Labor Market Transitions at Older Ages

Self-employment is an important aspect of the labor market activity of older workers and many wage and salary workers choose a period of self-employment before complete labor force withdrawal. Our analysis of the HRS data indicates that the determinants of self-employment transitions among these workers reflect those of younger workers. In particular, there appears to be an important effect of credit market imperfections, but little impact of employer-provided health insurance. In light of the demographic shift toward a relatively elderly population, these results suggest that the degree to which older workers utilize self-employment as a bridge to complete retirement will be more influenced by the distribution of wealth than by the private sector promise of medical insurance. Viewed from a research perspective, these results suggest the need for explicit modeling of joint life-cycle evolution of asset accumulation and the choice of working in the salaried and self-employed sectors. In addition, our results emphasize the importance of viewing retirement as a process. In addition to transitions from wage and salary work to self-employment (and vice versa), there are interesting patterns of re-entry to the labor force, and to self-employment in particular, that merit further attention.