Self employment and human capital

Abstract

The structure of production in the process of economic development embodies a shift from self-employment to wage work. This paper develops a simple labour allocation framework to explain this. The extent of human capital is shown to be an important determinant of the structure of employment. An increase in human capital initially results in an increase in self-employment as the efficiency of such production is enhanced with the improved managerial ability associated with higher education. Subsequently, increases in human capital increase the compensation to labour and cause the shift towards wage employment. Some policy implications of this are discussed in this paper.