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Self-employment effects on regional growth: A bigger bang for a buck?

Tsvetkova, Alexandra and Partridge, Mark and Betz, Michael (2016): Self-employment effects on regional growth: A bigger bang for a buck?

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Abstract

Economic development policies often revolve around supporting small businesses and new firm creation as they are locally grown and likely can be more influenced by state and local policy. Two prominent strands of current research—the regional economic growth and small business/entrepreneurship literatures—elucidate the importance of small, young firms for regional economic performance and the crucial role urban-rural proximity plays in the distribution of growth across space. Keeping these two research traditions in mind, we study the effects of self-employment on job growth in US counties. Our goal is to estimate the net employment spillovers from changes in self-employment (SE) and to compare them to spillovers from changes in wage and salary employment (WS). We ask the following research questions: Do exogenous net changes (shocks) in SE spur larger or smaller changes in employment than do equal changes in WS employment and do these effects vary across the rural-urban hierarchy? The answers to these questions are of paramount importance in devising economic development strategy across urban and rural settings. We use a differencing strategy and an exogenous measure of SE and WS employment shocks to estimate net multiplier effects and to investigate their relationship with proximity to differing-sized urban centers. The analysis uses US county-level data spanning the 2001-2013 period. The results suggest that marginal effects from self-employment are consistently larger than from paid employment, particularly in metropolitan counties. Given the dominant share of paid employment, however, the magnitude of economic impact is greater from wage and salary employment. Distance from urban centers generally offers protection that promotes SE growth but hinders WS employment growth. In an austere fiscal environment, spending a dollar to stimulate SE is likely to have greater returns as opposed to stimulating WS employment if the costs of creating one SE and one WS job are comparable.

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