The Role of Employer/Employee Interactions in Labor Market Cycles: Evidence from the Self-Employed

Abstract

Self-employed workers are less likely to be affected by implicit contracts, efficiency wages, and other forces that mute wage cyclicality and exacerbate employment cyclicality. This observation motivates our comparison of the cyclical experience of the self-employed with "wage and salary" workers who clearly have an employer. We find negligible or small differences in annual hours cyclicality between the two groups, but hourly wages and annual earnings are much more cyclical for the self-employed. These results are consistent with efficient contracting models where employers smooth workers' income without causing inefficiencies in hours of work.