An Occupational Choice Model For Developing Countries

Most occupational choice models introduce only two options for agents: entrepreneurial activities or wage-employment. However, these models represent inadequately the labor force distribution from developing countries, where an important proportion of the total work force are self-employed workers. Some models introduce self-employment as an occupational choice. These works have a common feature: when in equilibrium, wage earners belong to the lower end of the income distribution. Nevertheless, for a large set of developing countries, peasants and small proprietors are part of a self-employment sector that can mostly be found in the lower end of the income distribution. In contrast with previous efforts, in this work self-employment formation is consistent with data from most developing countries. We pay special attention to the conditions under which either the economy ends in a low income equilibrium where self-employment is the only form of production, or alternatively, the economy ends in a high income equilibrium with a well developed labor market. We study some public policy issues, paying special attention to role of capital markets and the efficiency of schooling.