TAXES, ECONOMIC CONDITIONS AND RECENT TRENDS IN MALE SELF-EMPLOYMENT: A CANADA-U.S. COMPARISON

North American workers have increasingly turned to self-employment since the 1970's. Analysts who have primarily focused on changes in technology, industrial restructuring and in the demographic composition of the work force as explanations for the rise in self-employment have had limited success. At the same time, international statistics suggest that countryor regionspecific factors, rather than widely-shared trends may play central roles in the evolution of self-employment rates. In this paper I assess the importance of two less commonly analyzed factors which do vary across regions and countries-macroeconomic conditions and the tax environment-in explaining the trends in male self-employment in North America. I use microdata for the period 1983-1994 from Canada and the United States, which are perhaps more similar in overall institutional structure than any other two countries, but which differ substantially in their income tax policy, macroeconomic conditions, and self-employment trends. My findings suggest that higher income tax and unemployment rates are associated with an increase in the rate of male self-employment in the two countries. Changes in the tax environment account for a considerable amount of the secular trends in male self-employment over this period, while changing economic conditions played a smaller role in determining these trends. 1 (1) Introduction The resurgence of self-employment in the United States has recently attracted the attention of a number of researchers (e.g. Blau 1987; Evans and Leighton 1989; Devine 1993). Attempts to explain this phenomenon have however met with only limited success, for a number of reasons. First, standard shift-share analyses tend to show that the factors most commonly invoked to explain this trend --industrial restructuring, and shifts in the demographic composition of the workforce-typically can account for only a small fraction of the observed changes. Second, another commonly-invoked explanation --changes in technology-remains very difficult to test, and in practice is often simply treated as a label attached to otherwise unattributable changes. Finally, although this is not typically noted in the literature, there is a third reason to be skeptical of structural and technological explanations of rising self-employment: recent trends in selfemployment rates are far from uniform across developed countries (OECD 1992). Indeed, with declines almost as common as increases across OECD countries, international statistics strongly suggest that countryor regionspecific factors, rather than widely-shared trends like cheaper computing power, feminization of the labor force, and the move to a service economy, may play central roles in the evolution of self-employment rates. The goal of this paper is to examine the role of two less commonly analyzed factors which do vary across regions and countries --macroeconomic conditions and the income tax environment-in explaining recent self-employment trends. Macroeconomic conditions have often been cited as a potential contributor to self-employment, especially to the extent that self-employment is used by some individuals as a “job” of last resort in poor labor markets (Quinn 1980, Becker 1984, and Bishop 1987). Tax policy, and especially the rate of personal income tax, have also been cited (e.g.