A Dynamic Multinomial Model of Self-employment in the Netherlands

This paper presents a dynamic multinomial logit model to explain the transitions into and out of self-employment using Dutch micro-panel data, the LISS panel. Based on the estimates we simulate employment paths for benchmark individuals. These are used to illustrate the limitations of the common assumption in wealth and pension income modeling, that individuals remain in their observed labour state until retirement. In particular, we find that although one year transition probabilities out of self-employment are not more than 10%, the chances that individuals who are self-employed remain self-employed for the majority of the next ten years can be much smaller, and vary substantially with individual characteristics such as education level and personality.