The dynamic role of specific experience in the selection of self-employment versus wage-employment

What drives an individual to choose self-employment over a more traditional wageearning job, or vice-versa? Expected earnings, income variability and other nonmonetary aspects such as independence and job satisfaction are possible answers. This type of decision-making may be inherently dynamic as choices affect the accumulation of specific experience and, thus, the evolution of a worker's skills and compensation. This paper models an individual's decision over employment type by estimating a dynamic, stochastic, discrete choice, optimization problem using panel data from Chile. We simulate choices of employment type in the hypothetical scenario of a proposed mandatory universal unemployment insurance structure under different categories of education and experience. We find a slight increase in the number of workers selecting self-employment due to the reform. Consistent with theories of accumulation of specific experience and specialization, we observe stronger movements the lower (higher) the amount of experience workers have in the departing (destination) sectors.