Taxes, Economic Conditions And Recent Trends in Male Self-Employment: A Canada-U.S. Comparison

North American workers have increasingly turned to self-employment since the 1970's. Analysts who have primarily focused on changes in technology, industrial restructuring and in the demographic composition of the work force as explanations for the rise in self- employment have had limited success. At the same time, international statistics suggest that country- or region- specific factors, rather than widely-shared trends may play central roles in the evolution of self-employment rates. In this paper I assess the importance of two less commonly analyzed factors which do vary across regions and countries--macroeconomic conditions and the tax environment-- in explaining the trends in male self-employment in North America. I use microdata for the period 1983-1994 from Canada and the United States, which are perhaps more similar in overall institutional structure than any other two countries, but which differ substantially in their income tax policy, macroeconomic conditions, and self-employment trends. My findings suggest that higher income tax and unemployment rates are associated with an increase in the rate of male self-employment in the two countries. Changes in the tax environment account for a considerable amount of the secular trends in male self-employment over this period, while changing economic conditions played a smaller role in determining these trends.