Why did self-employment increase so strongly in Germany?

Abstract

Germany experienced a unique rise in the level of self-employment in the first two decades following unification. Applying the nonlinear Blinder–Oaxaca decomposition technique, we find that the main factors driving these changes in the overall level of self-employment are demographic developments, the shift towards service sector employment and a larger share of population holding a tertiary degree. While these factors explain most of the development in self-employment with employees and the overall level of self-employment in West Germany, their explanatory power is much lower for the stronger increase in solo self-employment and in self-employment in former socialist East Germany.

Keywords::

• self-employment
• nonlinear Blinder–Oaxaca decomposition technique
• entrepreneurship
• Germany

Keywords::

• L26
• D22

Acknowledgements

We are indebted to Adam Lederer, Simon Parker, Alexander Schiersch, and Michael Wyrwich for helpful comments on earlier versions of this paper, as well as to two anonymous referees who made valuable suggestions that helped improving the paper. We are also grateful to the Research Data Centre of the Regional Statistical Office of Berlin and of Thuringia in Erfurt for on-site data access and for their support and cooperation.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

^1. Email: [email protected]

^2. Email: [email protected]

^3. According to OECD (2010), the share of self-employed persons in the economically active population decreased between 1991 and 2009 in countries such as the USA (from 9% to 7%), France (from 13% to 9%), the UK (from 15% to 13%), Australia (from 15% to 12%), Norway (from 11% to 8%) and Japan (from 22% to 13%). In Canada, the share of self-employed stagnated around 9%. The self-employment rate rose to a lower degree in the Netherlands (from 11.6% to 13.2%) and in Sweden (from 9.2% to 10.4%).

^4. Some studies such as Andersson and Koster (2011), Fotopoulos (2014), Fritsch and Mueller (2007) and Fritsch and Wyrwich (2014) investigate the development of regional start-up rates in established market economies such as Sweden, West Germany and the UK at an aggregate level. Some work investigates the emerging self-employment in former socialist countries of Central and Eastern Europe; see, e.g. Alesina and Fuchs-Schündeln (2007), Fritsch et al. (2014), Johnson and Loveman (1995), Smallbone and Welter (2001, 2009) and McMillan and Woodruff (2002). For an analysis of self-employment in West Germany over the 1984–1998 period, on the basis of micro-data from the German Socio-Economic Panel, see Lohmann and Luber (2004).

^5. Comparing the development of self-employment over the 1992–2008 period in 26 OECD countries, van Stel, Scholman, and Wennekers (2012) find that Germany experienced the greatest increase in solo self-employment among the countries in the sample.

^6. Focusing on changes in the level of self-employment activities, we do not analyse entries into self-employment. Entry is a rather different concept.

^7. The importance of being well educated as a crucial factor for entrepreneurship has been intensively discussed. See inter alia Dunn and Holtz-Eakin (2000), Delmar and Davidsson (2000), Davidsson and Honig (2003), Bosma et al. (2004) and Van Der Sluis, van Praag, and Vijverberg (2008).

^8. See also Georgellis and Wall (2005), Rosti and Chelli (2005) and Fairlie and Robb (2009) on the analysis and discussion of gender differences in self-employment.

^9. The change of the institutional environment in East Germany can be regarded as a test of Baumol's (1990) claim that the level of potential entrepreneurs is approximately the same in all societies but the proportion of those people who make productive use of their talent by running their own business depends on the ruling institutions. See Fritsch et al. (2014) for a detailed analysis of self-employment in East Germany.

^10. For an earlier analysis of the bridging allowance programme, see Hinz and Jungbauer-Gans (1999).

^11. For a comprehensive overview of the manifold policy initiatives to promote entrepreneurship in Germany, see Welter (2009).

^12. In Germany, setting up a business in the regulated crafts requires that the founder has a master craftsman' certificate (Meisterbrief). This requirement was abolished for 52 crafts occupations in 2004.

^13. Most programmes, however, have led only to a few start-ups being directly supported. The only exception is the financial support of female start-ups out of unemployment, in particular the so called ‘start-up-subsidy,’ which induced a higher share of women to start an own business. In contrast to many other programs, this subsidy was used on equal share by women and men (see Caliendo and Kritikos 2010) and impacted female entrepreneurship (see Caliendo and Künn, 2015).

^14. Global Entrepreneurship Monitor (GEM) data indicate that much of the self-employment observed in poorer countries is probably motivated by necessity; see Bosma, Wennekers, and Amorós (2012) for details.

^15. According to GEM data, the level, as well as the share, of opportunity entrepreneurship in Germany showed, however, no clear trend over the 2001–2011 period (Brixy, Sternberg, and Vorderwülbecke 2012).

^16. For more detailed information on the current Micro-Census programme, see Micro-Census Law 2005 of 24 June 2004 (Federal Law Gazette I, p. 1350).

^17. It is quite remarkable that the Total Early-Stage Entrepreneurial Activity Index, which constitutes the main measure for the level of entrepreneurship in the GEM study, does not show an increasing trend for Germany between 2001 and 2009 (Brixy, Sternberg, and Vorderwülbecke 2012), while the Micro-Census recorded an increase in the self-employment rate of about 11% (from 9.8 to 10.9) over this period.

^18. The rise in the number and the level of self-employed with employees in East Germany was particularly pronounced in the first 10 years following German unification. Over this relatively short period of time, East Germany caught up to the level of West Germany, thus indicating that the change to a market system created sufficient demand for products offered by small firms. In the following years, the level of self-employment with employees remained comparable in both parts of the country while there is clear evidence that the quality and size of businesses in East Germany is still below the level in West Germany.

^19. A number of indicators that are often used for explaining the propensity of a transition into self-employment are not suited for an analysis of the stock in self-employment and have, therefore, not been included in the analysis. This pertains to income, the personal wealth level, the number of children and the size of the community where a person lives.

^20. A higher share of women among self-employed could be partly induced by various supporting programmes by the German Federal Government devoted to fostering entrepreneurship among females. Those support measures were particularly focused on individual-level barriers that may prevent women to become entrepreneurs such as lack of human or financial capital (see Welter 2006, 2009). An increased share of women among paid employees may have resulted from an increased attractiveness or availability of labour market opportunities for women, in particular of part-time jobs that may meet the requirements for work–family balance.

^21. According to the German Labor Force Statistics (Erwerbstätigenstatistik), the share of service employment in Germany increased from 60.9% in 1991 to 73.4% in 2009, while the employment share of the manufacturing sector decreased from 36.1 to 24.9% over the same period. See Federal Statistical Office (2012).

^22. As a consequence, the overall rate of self-employment in this sector decreased from 11.57% to 10.75%. A more precise look at this development reveals that the rate of self-employment with employees in the deregulated crafts occupations decreased over time (from 5.41% to 3.66%); while – on contrary – the solo self-employment rate has remarkably increased (from 6.17% to 7.10%).

^23. Lohmann and Luber (2004), in their analysis of the development of self-employment in West Germany over the 1984–1998 period, identify a structural shift to the service sector and high unemployment as important sources of an increase in self-employment, particularly of solo self-employment.

^24. The dependent variable is a respondent's self-reported occupational status as being self-employed. This includes all self-employed persons with and without employees, as well as freelancers and owners of family businesses.

^25. It is remarkable that in the estimations for 1991, the coefficient for age-squared is only statistically significant for East Germany but not for West Germany (Table A3). This means that the decline in the propensity for self-employment after a certain age is only relevant for East Germans and not West Germans. An explanation for this finding could be that older East Germans, having lived under a socialist regime for a relatively long time, maintained stronger anti-capitalistic values and attitudes than their younger counterparts (Wyrwich 2013). In the estimations for 2009 the coefficient for age squared is statistically significant in both parts of the country.

^26. For further explanations of this evidence, see Caliendo, Fossen, and Kritikos (2009, 2014), Verheul et al. (2012) and Marlow and Swail (2014).

^27. Interestingly, Pistrui et al. (2000), in their study of family businesses from a West German and an East German region in the late 1990s, find considerable differences with regard to entrepreneurial orientation. The study indicates that, on average, East German entrepreneurs show greater commitment to their venture. The representativeness of the underlying sample is, however, largely unclear.

^28. For other applications of this technique, see e.g. Fitzenberger, Kohn, and Wang (2011).

^29. This interpretation does, however, require that all relevant variables for structural change are included in the analysis. See Section 6 for a discussion of this issue.

^30. See Fairlie (2005) for a more detailed description of this procedure.

^31. This figure is the sum of the East German self-employment rate in the year 1991 and the increase in self-employment in East Germany that can be attributed to changes in the economic structure between 1991 and 2009, based on the behavioral coefficients estimated for 1991.

^32. For ease of interpretation, the contributions of independent variables can be expressed in percent by dividing the corresponding coefficient over the gap of the dependent variable, i.e. the change of the self-employment rate between 1991 and 2009.

^33. Lohmann and Luber (2004, 67) conclude from their analysis that, ‘there are distinct forms of self-employment which differ considerably from each other in terms of their underlying determinants and outcomes’.

^34. This incomplete coverage of the determinants of entrepreneurship probably leads to an overestimation of the part of the increasing self-employment that could not be explained by characteristics of the economic structure. Since information about the complete set of all potential determinants of self-employment is rarely available this type of analysis will generally suffer from some vagueness of interpretation.