Dependent self-employment as a way to evade employment protection legislation

This paper examines whether the strictness of employment protection legislation encourages employers to contract out work to their own paid employees by the formula of dependent self-employment, while making transitions to independent self-employment less likely by altering the relative valuation of risk between salaried work and self-employment in favour of the former. In conducting this analysis, discrete choice models are applied to data drawn from the European Community Household Panel from 1994 to 2001. To test the hypotheses, a tentative individual measure of the potential severance payment that a worker would receive in the case of dismissal is included as well as aggregated variables that try to capture differences in labour market institutions and macroeconomic conditions. Evidence for a positive impact of the strictness of employment protection legislation and the potential severance payment on transitions to dependent self-employment is found. The opposite effects, however, are detected for individuals becoming independent self-employed.