Master Thesis Business Administration: Small Business & Entrepreneurship
The impact of self-employment on subjective well-being in Europe
By
BOB DE JONG
S2789744
Abstract
This is the place with the abstract of this research. An abstract generally includes the motivation, the contribution (what is new), approach, results, and conclusions.
University of Groningen
Faculty of Economics and Business
April 2018
Supervisor: Dr. F. Noseleit
Co-assessor: ?
Word count: ?
Table of Contents
1. Introduction
In 2015, the self-employed formed a sizable proportion (14.9%) of the EU28 employed labour force (Eurofound, 2017). Every year, lots of individuals have the possibility to decide whether to become (or stay) organizationally employed or to become self-employed. This decision should not only be based on the effects it has on their income, individuals should also take the effects on their personal wealth in consideration. Studies of wealth understate that self-employed enjoy higher living standards than observed among the majority of organizationally employed (Carter, 2011). Furthermore, research shows that, despite experiencing longer working hours and heavier demands than regular employees, self-employed are more satisfied with their jobs because their work provides more autonomy, flexibility and skill utilizations, and greater job security (Hundley, 2001; Sevä et al., 2016).
A lot of research has been conducted on the determinants of, or reasons for, pursuing self-employment. This stream of research mainly focuses on the positive aspects of self-employment that attracts people to become self-employed. Comparatively, only little research has been conducted on the consequences and outcomes of self-employment in terms of health and well-being (Dolinsky & Caputo, 2003; Sevä et al., 2016). Furthermore, there are a number of studies looking at the subjective well-being of organizationally employed, but only few studies focussed on the self-employed from this perspective (Andersson, 2008). Of the studies that have been conducted, most research findings suggest a positive relationship between self-employment and subjective well-being (Andersson, 2008; Blanchflower, 2004; Sevä et al., 2016). However, not all studies find this positive relation between self-employment and subjective well-being and point out differences in subjective well-being among the self-employed. Jamal (1997), for example, states that being self-employed actually negatively influences subjective well-being. Binder and Coad (2013), showed that the reason for becoming self-employed influences whether or not well-being is positively influenced. Previous research by Sevä et al. (2016) points out that it is important to consider heterogeneity among self-employed when examining subjective well-being. They showed notable differences in subjective well-being between male and female self-employed, immigrant and native self-employed, and self-employed with and without employees. Their research suggests that it is necessary to uncover additional explanations for differences in subjective well-being among the self-employed. Therefore, the current research will make an attempt to investigate these explanations. This will be done on the individual and the contextual level.
One individual level factor that might influence subjective well-being of the self-employed is whether or not the self-employed has employees. The study of Seva et al. (2016) showed that the levels of life satisfaction reported by the self-employed are higher for those with employees than those without employees. Furthermore, Benavides et al. (2000) found in a study on 15 countries of the European Union that self-employed without employees reported higher levels of job dissatisfaction and muscular pains than the self-employed with between one and nine employees. Interestingly, Europe shows a trend with an increase in self-employment without employees, which saw a rise from 10.1% to 10.7% in the EU28 labour force between 2002 and 2015. The strongest increase has been in the Netherlands (Eurofound, 2017), where the total number of self-employed without employees doubled between 2007 and 2017 (CBS, 2017). If an individual is self-employed and does not have employees, he or she will only be responsible for his or her own personal well-being. Once the self-employed starts having employees he or she will not only be responsible for his or her own well-being, but also for the well-being of the employees. According to Benavides et al. (2000) having this responsibility for others is not only be beneficial for the experienced subjective well-being of the self-employed. They state that self-employed with employees experience higher stress levels compared to the ones without employees, which negatively influences their subjective well-being.
Furthermore, not only individual level factors influence the subjective well-being of the self-employed, subjective well-being is also influenced by contextual level factors. Sevä et al. (2016), for example, showed that the macroeconomic factor, economic growth, positively influences life satisfaction of the self-employed. Another contextual factor that might influence subjective well-being of the self-employed is the socio-economic factor, social protection (Benavides et al., 2000). One of the main differences between the EU28 countries is the difference in access to social protection for the self-employed. Self-employed experience gaps in terms of entitlement to social protection and certain rights, contribution gaps and integration gaps (Eurofound, 2017). The modern labour market has a faster growing number of flex contracts than full time contracts, leading to increased job insecurity. According to Sjöberg (2010), job insecurity is associated with concerns about future financial security. Knowing that there will be governmental economic support during a period of unemployment may decrease the negative effect job insecurity has on an individual’s well-being.
The goal of this study is to investigate the effect of self-employment for subjective well-being among the self-employed both with and without employees. Furthermore, this research will examine whether the country specific socio-economic condition, social protection, is a significant factor affecting the relationship between self-employment and subjective well-being. The research question that is used in this research is:
What is the effect of the country specific socio-economic condition, social security, on the relation between self-employment and subjective well-being?
Benavides et al. (2000) already stated that future research should take social protection in consideration when examining subjective well-being. Since then not much research paid attention to this subject, and this will therefore be the main contribution of this research. To answer the research question, this article uses survey data from Eurofound, the European Foundation for Improvement of Living and Working Conditions, called the Sixth European Working Conditions Survey. A dataset will be formed based on their data on the type of employment, whether self-employed have employees and subjective well-being indicators of the individuals. The dataset will be filled further with data from MISSOC, EU's Mutual Information System on Social Protection, which provides information about the diverse social protection systems in the EU28, Switzerland and Norway. The compiled database allows for the analysis of cross-country differences among the EU28 countries, Switzerland and Norway.
2. Literature review
Douglas and Shepherd (2000) state that an individual chooses a career that maximizes individuals’ utility. Therefore, being self-employed can be seen as an utility-maximizing career choice by an individual. This means that an individual chooses to become self-employed if the total utility that an individual derives from his or her occupation (via their income and the working conditions such as decision-making control, exposure to risks, required work effort and net perquisites associated with self-employment) is greater than the expected utility from being organizationally employed.
Once an individual chose an occupational type and started working, work will become a major aspect of human life and will have strong effects on individuals’ satisfaction with life (Binder & Coad, 2013). A way to measure individuals’ satisfaction with life is by assessing an individual’s subjective well-being, which is a measure of the quality of life of individuals and of societies. The study field of subjective well-being concerns what people call happiness or satisfaction. Although every individuals’ personality differs and therefore explains a significant variability in subjective well-being, life circumstances, such as occupational type, influence the long-term well-being levels of individuals and societies (Diener, Oishi & Lucas, 2003).
This research will investigate the influence self-employment has on subjective well-being. The literature review is divided into four sections. The first section reviews the existing literature on self-employment and subjective well-being, the second section reviews the existing literature on self-employment with and without employees, the third reviews the existing literature on self-employment and their social protection rights and the final section describes the conceptual model for this research.
2.1 Self-employment and subjective well-being
The interest in research on both self-employment and subjective well-being is increasing. Despite this fact, only little work is available which combined the two and looked at the subjective well-being of the self-employed. The narrower concept of subjective well-being, job satisfaction, has been investigated more often. Research findings generally show that the self-employed experience a higher degree of job satisfaction than the organizationally employed (Blanchflower, 2004). The working life of the self-employed differs from the working life of the organizationally employed, therefore there are reasons to expect differences in their subjective well-being as well. Previous research shows that self-employed experience greater autonomy, a higher degree of flexibility and more skill utilization in their working life than the organizationally employed (Hundley, 2001; Coad & Binder, 2014). These are all reasons to believe that being self-employed leads to a higher level of subjective well-being.
On the other hand, self-employment can also be connected to factors that lead to a lower subjective well-being. First of all, research suggest that self-employed have lower initial earnings and lower earnings growth than in paid employment (Hamilton, 2000). Furthermore, the self-employed make more working hours, have less free time and have more responsibility for their own job and incomes, and, in case of the self-employed with employees, for their jobs and incomes as well. Consequently, self-employed experience lower levels of work-life balance as compared to the organizationally employed (Nordenmark, Vinberg & Strandh, 2012).
Despite the foregoing arguments, most empirical findings on the relationship between self-employment and subjective well-being report that the self-employed in general score higher on subjective well-being than organizationally employed (Andersson, 2008; Hundley, 2001; Sevä et al. , 2016). Hamilton (2000), shows that self-employed are willing to sacrifice earnings in return for the nonpecuniary benefits of self-employment. Furthermore, Binder and Coad (2013) show that individuals who move from regular employment to self-employment experience an increase in life satisfaction up to two years later. One of the most recent studies linking self-employment to subjective well-being is done by Sevä et al. (2016), who showed that self-employment is positively related to subjective well-being. In order to replicate previous studies and control the varying findings I hypothesize the following:
Hypothesis 1: Self-employment has a positive effect on subjective well-being.
2.2 Self-employment and employees
Previous research used to treat the self-employed as a homogenous group, having the same rationale and working conditions. This actually is a false assumption since there is a high degree of heterogeneity among the self-employed in terms of personal characteristics, motivations and working conditions (Fuchs-Schundeln, 2009). More recent work on these subjects focused on the diversity in working conditions and on different reasons for becoming self-employed (Binder & Coad, 2013; Sevä et al, 2016; Prottas & Thompson, 2006). Sevä et al. (2016) for example showed that there are significant differences between male and female self-employed, self-employed with and without employees and between native and immigrant self-employed individuals. Knowing that the conditions of self-employment influence the effect self-employment has on subjective well-being raises questions under which conditions self-employment is beneficial for subjective well-being.
A condition of self-employment on the individual level is whether or not the self-employed has employees. The majority of the self-employed are self-employed without employees (52%) and only about 8% have ten or more employees . Having employees might have a positive effect on subjective well-being of the self-employed. Sevä et al. (2016) showed that self-employed with employees have a higher level of life-satisfaction than the self-employed without employees. On the other hand, research by Benavides et al. (2000) shows that having employees can also negatively influence subjective well-being. They showed that the stress levels of the self-employed with employees were higher compared to the self-employed without employees. This might be due to the fact that the self-employed, in a work-related atmosphere, is not only responsible for his or her own personal well-being, but for the well-being of the employees as well. Although having employees might increase stress levels, Benavides et al. (2000) also found that not having employees has a great impact on the well-being of the self-employed. They found that self-employed without employees report higher levels of job dissatisfaction, fatigue and muscular pains than the self-employed with employees. In order to replicate previous studies and control the varying findings I hypothesize the following:
Hypothesis 2: Having employees has a positive effect on the relationship between self-employment and subjective well-being.
2.3 Self-employment and social security systems
Previous research conducted by Eikemo et al. (2008) looked at differences in self-perceived health in Europe and linked these to the different welfare state regimes in Europe. The study showed that almost 90% of the variation in health could be explained by variations on the individual-level, while the other 10% of the variation could be explained by the differences in the contextual level, specifically the differences in national welfare state characteristics.
When an individual starts working and becomes either self-employed or organizationally-employed, he or she will generate an income out of that occupation. Sometimes it occurs that an individual becomes unemployed, due to for example age or sickness, and loses his or her income. According to Diderichsen (2002), having an income is important, since income mediates the effect of social position on health. Not having an income or having a low income is for example related to indicators of an unhealthy lifestyle, like poor nutritional behaviour, lack of physical activity and obesity. When an individual finds himself in a situation where he or she would not be able to generate an income, they could apply for governmental income maintenance as a form of social insurance. Countries that provide welfare provision and welfare services are called welfare states. Welfare states are important determinants of health in Europe. By providing welfare provision, in terms of social transfers (housing, unemployment, pensions, sickness and disability benefits) and welfare services (healthcare and social services), welfare states mediate the extent, and impact, of labour market position and health (Eikemo et al., 2008).
The European Union consists of 28 countries which all have different ways of providing social security to their inhabitants. According to Bambra and Eikemo (2008), the countries can be divided into five different groups of welfare state regimes (The Scandinavian, Bismarckian, Anglo-Saxon, Southern and Eastern). One of the major differences between the welfare state regimes is the income maintenance in times of unemployment, old age or long-term absence due to sickness. The differences between the regimes are based on three interrelating principles: universalism, social insurance and means-testing. Universal systems provide universal provision to all citizens as long as specific demographic, social or health related criteria are fulfilled. In social insurance systems, an individual is entitled to benefits if he or she has made previous contributions and benefits are based on previous earned income. In a means-testing system an individual is entitled to benefits if they need financial support after they have exhausted all other sources of income, like personal savings.
Another major difference between the welfare state regimes is the extent to which self-employed have access to social protection (Spasova et al., 2017). The self-employed employed experience gaps in terms of entitlement to social protection and certain rights, contribution gaps and integration gaps, whereby some other entitlements, like housing or credit, might be linked to an individual’s employment status. In all European countries the social protection rights for the self-employed are currently being revised and discussed. These discussions are linked to initiatives to bring provisions for non-standard workers, eg. self-employed, closer to the level of those of organizationally-employed. Some countries even formed different self-employment groups and make distinctions between those groups in terms of risks that are covered (Eurofound, 2017). The European countries can be divided into four groups when the social risks and social protection coverage for self-employed and organizationally-employed are compared across countries:
– Inclusive systems
– Specific social security systems for the self-employed
– Universal elements but no specific system for the self-employed
– Limited universal social security rights
Inclusive systems are mainly found in the Nordic countries (Denmark, Finland, Norway and Sweden), where the self-employed in general have the same social protection as the organizationally-employed, since most of their welfare state regimes are based on universalism. The second group is more or less based on the social insurance system and provides specific social security systems for the self-employed. This is the case for the more Western European countries (Austria, Belgium, France, Germany, Greece, Italy, Luxembourg, The Netherlands, Spain and Portugal). The third group consist out of more Eastern European countries (Croatia, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, Slovenia and Switzerland). This group provides universal elements in the social protection system for both self-employed and organizationally-employed, eg. healthcare and pensions, but other schemes do not exist or are voluntary for the self-employed. The last group provides very limited universal security rights for the self-employed. If the self-employed want to have a more generous insurance, they need to take a private insurance, which is voluntary and not linked to the state social protection system.
It is well known that being self-employed leads to a more risky income than being organizationally-employed. As mentioned before, income is related to health. Knowing that you will always have an income, out of social protection, might decrease for example stress levels of the self-employed and therefore increase the subjective well-being of the self-employed. Knowing that you will always have a risky income and not having a social security net to ensure an income might have the effects the other way around. Therefore I hypothesize that:
Hypothesis 3: “Inclusive systems” have the most positive effect on the relationship between self-employment and subjective well-being, followed by “specific social security systems for the self-employed”, “universal elements but no specific system for the self-employed” and the least positive effect on the relationship between self-employment and subjective well-being is created by the “limited universal social security rights system”.
2.4 Conceptual model
3. Data and methods
3.1 Data collection methods
The data that is going to be used to test the hypotheses is derived from Eurofound’s Sixth European Working Conditions Survey (ECWS). The data for this survey is collected by Eurofound, the European Foundation for the Improvement of Living and Working Conditions. In 1991, Eurofound carried out the first survey and in 2015 they carried out its sixth survey in the series. By interviewing nearly 44,000 workers face-to-face in 35 countries, they were able to create an overview of the varying working conditions across Europe. The data that has been collected for the Sixth ECWS covers the EU28, Norway, Switzerland, Albania, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey. The range of questions is very broad and includes information about the interviewee’s work life and working conditions. This survey fits this research perfectly as it is able to make a distinction between organizationally-employed and self-employed with and without employees, while it also contains information about their subjective well-being. The data file will further be filled with data derived from MISSOC, the European Union’s Mutual Information System on Social Protection. MISSOC provides data on the social protection systems in the 28 EU Member States including Iceland, Liechtenstein, Norway and Switzerland. The data that will be taken from MISSOC is the data on the social protection arrangements for the self-employed. MISSOC does not contain information on the Iceland, Liechtenstein and the EU candidate countries (Albania, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey), therefore data of these countries will be taken out of the data file and this research will only focus on the EU 28 countries plus Norway and Switzerland. Furthermore, the sample is restricted to include only individuals who were employed at time of the survey and filled in all questions on subjective well-being. The total sample that is used to analyze the hypothesis consists out of 35.120 cases.
3.1.1 Dependent variable: Subjective Well-Being
The dependent variable “subjective well-being” is going to be measured according to the World Health Organization Well-Being Index (WHO-5). This measurement tool is among the most used questionnaires assessing subjective well-being (Topp et al., 2015). It uses a five item questionnaire and measures subjective well-being on a short and generic global rating scale. The WHO-5 items are 1. ‘I have felt cheerful and in good spirits’, 2. ‘I have felt calm and relaxed’, 3. ‘I have felt active and vigorous’, 4. I woke up feeling fresh and rested’, 5. ‘My daily life has been filled with things that interest me’. The respondent is asked to rate how well each of the items applies to him or her considering the last two weeks. Each item is rated on a 1 (All of the time) to 6 (At no time) Likert scale, which will be recalculated to 5 (All of the time) to 0 (At no time). The result of the WHO-5 results in a score which can range from 0 (absence of well-being) to 25 (maximal well-being). If an individual scores 13 or higher he or she can be considered to be part of the high well-being group, while an individual scoring below 13 is considered to be at the low well-being group. The mean value in the total sample is 17,27 and the standard deviation is 4,92.
3.1.2 Independent variable: Self-employment status
The main independent variable of this research is self-employment status. To measure whether an individual is self-employed or organizationally-employed the question ‘Are you working as an employee or are you self-employed?’ is used. The ‘employees’ are the group who get a salary from an employer or a temporary employment agency and the ‘self-employed’ include people who have their own business or are partners in a business as well as freelancers. The self-employed may or may not have employees.
3.1.3 Mediating variable: Social protection system
The mediating variable, or contextual level variable, in this research is the national social protection system. This socio-economic variable is derived from MISSOC. Information about the EU28 countries plus Norway and Switzerland is analysed to form four groups. The four groups are formed based on their inclusiveness of the self-employed in the national social protection systems. The four groups are formed as shown in Table 1.
Table 1. Social protection system groups
Social protection system groups Countries
1. Inclusive systems Denmark, Finland, Norway, Sweden
2. Specific social security systems for the self-employed Austria, Belgium, France, Germany, Greece, Italy, Luxembourg, The Netherlands, Spain, Portugal
3. Universal elements but no specific system for the self-employed Croatia, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, Slovenia, Switzerland.
4. Limited universal social security rights Bulgaria, Ireland, United Kingdom
3.1.4 Control variables:
The control variables that are used in this research are ‘age’, ‘gender’ and ‘educational level’.
Gender, male or female
Age, 15 – 87, 5 groups (15-24, 25-39, 40-54, 55-64, 64 – 87)
Educational level, based on ISCED level 0 to level 6.
3.2 Analysis plan
3.3 Discussion of validity and reliability
Results
Discussion of the results
Testing of hypotheses or developing propositions/process models
Discussion and conclusion
Explanation of findings in relation to other studies – same/different results as compared with existent research? Any explanation for the study’s findings?
Answer to the research question
Theoretical and managerial implications
Limitations and future research
References
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Appendices