Webex-seminar: Household income and self-protection by the self-employed (with Piotr Denderski)

In this paper we argue that a lack of insurance contributes to the precariousness of self-employment. We document that self-employed workers earn less per hour when they have worse access to other sources of income within their household. Using annual British panel data, we regress hourly self-employed earnings on `residual household income' - a combination of spousal income, income from savings and investment, income from a second job, etc. - in an otherwise standard Mincer equation. Robustness to individual fixed effects shows that the effect is not driven by positive assortative matching in the marriage market. Because residual household income cannot plausibly be exogenous, we also identify the effect from changes in residual household income that coincide with household formation and separation. The effect is economically significant: moving up one standard deviation in the distribution of residual household income increases hourly earnings by 5 to 11%. We interpret this effect as self-protection: risk-averse self-employed workers' attempts to increase the likelihood to earn income by decreasing their prices. Consistent with this interpretation, self-employed workers with higher residual household income work fewer, but more dispersed hours. Moreover, the effect on hourly earnings is absent for payroll employees, who cannot readily choose their own wages.