Heterogeneous entrepreneurs from occupational choices in economies with minimum wages

Social Capital, Trust and Entrepreneurial Productivity

“…Traditional occupational choice models do not consider the solo self‐employed as a third alternative occupational choice additional to employees and employers. The theoretical predictions on how higher level of generalized trust will affect the equilibrium number of solo self‐employed in the occupational choice equilibrium are not as robust as the predictions on the productivity of entrepreneurs‐employers (Medrano‐Adán et al ., ). Since the solo self‐employed individuals do not hire employees, there are no scale economies effects from the quality of their entrepreneurial decisions.…”

“…The entrepreneurial input enters the production function in two ways, as part of the total factor productivity component of the production function and as a management input that supervises the execution of strategic decisions. The production function that captures the assumptions of the occupational choice theory is formulated as follows (Rosen, ; Medrano‐Adán et al ., ):…”

“…The basic theory on the determinants of the number of entrepreneurs as solo self-employed in an economy is based on Lucas (1978), on the equilibrium distribution of firm sizes from the occupational choice of individuals with different levels of entrepreneurial skill. The original work, that allows for only two occupational groups, employers and employees, is extended in Salas-Fumás et al (2014) and Medrano-Adán et al (2015) to account for the solo self-employed as a third occupational choice, and for management costs (Coase, 1937;Rosen, 1982). In this section, we briefly describe the model and main results, and explain the relationship between the predictions of the model and other related results in the literature on social capital-trust and entrepreneurship.…”

“…A value of the parameter β lower than one implies that the term F K,L 1− has decreasing returns to scale in labour and capital. Since the skills of the entrepreneur e are fixed, when the entrepreneur chooses K and L that maximize profits for given input and output prices, the output and profits are positive and increasing with skills e. Individuals working as employees only earn the market-determined salary (Medrano-Adán et al, 2015).…”

“…The comparative static analysis shows now that higher β implies a higher number of both solo self-employed and employers, in the new equilibrium. Medrano-Adán et al (2015) solve for the occupational equilibrium in an economy with three occupational groups and a minimum wage. The market equilibrium now includes two groups of solo self-employed, those who voluntarily choose solo self-employment, with relatively high skills and income, and those who involuntarily become solo self-employed, with skills lower than the minimum skills at which a person finds a job as employee and earns the minimum wage.…”