This study examines whether expanding the pool of beneficiaries for unemployment insurance (UI) to the self-employed is a way to ensure better social protection. First, we document the self-employed’s income variability, job security, and job transition paths after a business closedown, also comparing these factors to wage earners. Second, we use model simulations to analyze the effects of mandatory UI for the self-employed on labor market tightness, fiscal soundness, and self-employment rate.

Our comparison of the self-employed and wage-earning employees, based on the Korean Labor and Income Panel Study (KLIPS) and the Survey of Household Finances and Living Conditions (SHFLC), yields the following findings: (1) the self-employed are constantly exposed to fluctuations in business income, which may lead to business failure; (2) there is no substantial difference between the self-employment duration of the self-employed and the employment duration of full-time employees; and (3) a significant number of self-employed individuals choose to start new businesses after their previous businesses close down.

Such results imply that the government may increase the coverage rate of the self-employed by increasing the unemployment benefit level or decreasing the contribution level without harming fiscal soundness. However, establishing an income verification system for the self-employed should proceed or coincide with expanding insurance coverage for self-employed workers to address pertinent concerns, including adverse selection due to lack of income information and moral hazard due to the difficulty of evaluating involuntary business cessation. Moreover, additional assistance is necessary for the self- employed who re-start businesses after closedown.

This study employs a model-based approach to estimate the impact of UI on entrepreneurs. Building on the standard search and matching framework, it incorporates the decision-making processes of entrepreneurs. A model-based approach offers several advantages, enabling analyses of the direct effects of policy changes on the economy and the indirect effects through entrepreneurs’ adjustment to those changes. Our results suggest that extending UI to self- employed entrepreneurs would lead to increased business closures and reduced hiring, causing a slack labor market and higher unemployment. This, in turn, would put pressure on the UI budget, and social welfare would decrease overall. Longer duration of unemployment and reduced government transfers offset increased welfare for former entrepreneurs from receiving UI benefits. However, the study also finds that social welfare can be improved by the government subsidizing UI contributions for entrepreneurs, especially when targeted financial support is provided to low-income entrepreneurs. In that case, UI for entrepreneurs achieves greater social welfare improvement than other social protection systems, such as unemployment assistance.

Publisher's Note
Summary

Chapter 1: Introduction

Chapter 2: Status of Self-employed Workers and Employment Insurance
Section 1: Definition of Self-employed Workers
Section 2: Status of Self-employed Workers
Section 3: Employment Insurance for Self-employed Workers
Section 4: Cases of Employment Insurance for Self-employed Workers Overseas
Section 5: Conclusion: Difficulties in Applying Employment Insurance to Self-employed Workers

Chapter 3: Basic Analysis of Applying Employment Insurance to Self-employed Workers
Section 1: Income Volatility of Self-employed Workers
Section 2: Survival Rate of Self-Employment
Section 3: Behavior After Closure
Section 4: Exploration of Factors Related to Closure and Transition Path
Section 5: Directions for Improving Employment Insurance for Self-employed Workers
Appendix

Chapter 4: Economic Effect Analysis of Applying Employment Insurance to Self-employed Workers
Section 1: Model Economy
Section 2: Quantification of the Model
Section 3: Economic Effects of Introducing Employment Insurance for Self-employed Workers
Section 4: Policy Experiment
Section 5: Conclusion

Chapter 5: Conclusion

References
ABSTRACT