Help from the past-coworker ties and entry wages after self-employment

Plain English Summary Self-employed should use their social ties when they exit and seek employment as it helps to mitigate information asymmetries present in the hiring process. However, even if they do, the self-employed earn less than employees who merely change jobs. Our study provides the first empirical evidence on how the currently self-employed use and gain from their coworker networks. The findings are robust to various definitions of the network as well as sample selection issues. However, the results are driven mainly by the highest skilled individuals and those with high skilled networks. Our results lead to ample future research avenues for both empirical and theoretical contributions in the area. This paper empirically estimates how referrals mitigate the risk associated with hiring formerly self-employed individuals. We do this by comparing the networks and entry wages for two groups of new hires: those who exit self-employment to become wage-employed and those who change employers as wage employees, i.e., job changers. Referrals are defined as coworker ties through which the new hire and an incumbent worker share a common employment history before their current employment. We use longitudinal Swedish register-based data to evaluate the entry wages of the two groups of new hires for the years between 2010 and 2013. The results show that having coworker ties is associated with 2.9% higher entry wages and that this network premium is uniform across the formerly self-employed and job changers. However, the new hires from self-employment have consistently lower entry wages than the job changers, even if the exiting self-employed have coworker ties.