Self-Employment and Labor Market Transitions at Older Ages

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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.