Employment or Self-Employment : A Dynamic Utility-Maximizing Model

Although self-employed individuals represent an important section of the U.S. labor force, the scholarship on careers focuses primarily on job mobility patterns within and across established firms, neglecting the aspect of self-employment. A dynamic utility-maximizing model of career choice between self-employment and employment is offered. The model builds on previous economic models proposing that jobs differ in income, work required, risk involved, and independence allowed. Research on life cycle and career stage models has suggested that as people age, their attitudes change. Changing attitudes toward income, work, risk, and independence, as well as changing abilities to complete tasks, also influence career choices. A dynamic model of career choice considering these changes is provided.Five optimal career paths are proposed depending on: the individuals' initial utility for self-employment over employment; initial utility associated with the perceived maximum difference in income between self-employment and employment; marginal reduction in utility for self-employment over employment from aging; and final utility for self-employment over employment. The model provides a tool to analyze the possibility of individuals switching between employment and self-employment as they age and suggests under what conditions this might occur. (CBS)