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European Societies
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SELF-EMPLOYMENT IN POST-
COMMUNIST ECONOMIES
a b c
Kasia Karpinska , Ineke Maas & Wim Jansen
a
Department of Law, Economics and Governance ,
Utrecht University , Utrecht , The Netherlands
b
Department of Sociology/ICS , Utrecht University ,
Utrecht , The Netherlands
c
Department of Methodology & Statistics , Utrecht
University , Utrecht , The Netherlands
Published online: 06 Sep 2012.

To cite this article: Kasia Karpinska , Ineke Maas & Wim Jansen (2012) SELF-
EMPLOYMENT IN POST-COMMUNIST ECONOMIES, European Societies, 14:5, 684-703, DOI:
10.1080/14616696.2012.721890

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European Societies
14(5) 2012: 684703
2012
Taylor & Francis
ISSN
1461-6696 print
1469-8307 online

SELF-EMPLOYMENT IN
POST-COMMUNIST ECONOMIES
A cross-country comparison, 19962005

Kasia Karpinska
Department of Law, Economics and Governance, Utrecht University, Utrecht,
The Netherlands

Ineke Maas
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Department of Sociology/ICS, Utrecht University, Utrecht, The Netherlands

Wim Jansen
Department of Methodology & Statistics, Utrecht University, Utrecht, The Netherlands

ABSTRACT: According to the market transition theory the economic success


of individuals in post-communist countries is affected by both individual
characteristics and structural contexts. We investigate this claim using data
on self-employment in four post-communist countries (Bulgaria, Russia,
Estonia and Hungary) in 1996 and 2005. We find support for a relationship
between context-characteristics and self-employment; especially countries
with lower levels of corruption show higher odds of self-employment.
Unexpectedly, as the transformation process proceeded, human capital did
not become a more important predictor for self-employment.
Key words: self-employment; post-communist economies; market
transition theory; structural context

1. Introduction

The emergence of a self-employment sector is a crucial part of the transition


from planned economies to market economies in the former state socialist
countries (Bonnell and Gold 2002). As indicated by several scholars (Rona-
Tas 1994; Earle and Sakova 1999, 2000; Hanley 2000; Arum and Muller
2004) the centrally planned economies of Eastern Europe were among the
regimes most hostile towards private economic activity. While not always
completely prohibited, self-employment and other forms of proprietorship
were heavily discouraged. The collapse of communism created new
opportunities for economic development, including self-employment.

684 http://dx.doi.org/10.1080/14616696.2012.721890
Self-employment in post-communist economies KARPINSKA ET AL.

Although the explanation of economic choices of individuals has


traditionally been a domain of economics, there is a considerable share of
such choices that cannot be explained by micro economic models only. In
the case of the transition from state socialism to a market-oriented economy,
structural changes considerably affected the possibilities to become self-
employed. We therefore expect that sociological tools, focusing on social
processes on both the macro and micro level, can contribute to a better
understanding of the process. We ask the following question: What is the
impact of the changing structural context during the transition from state
socialism to a market oriented economy on the odds of self-employment and
on the importance of human capital as a predictor of self-employment?
Most studies on self-employment in post-communist societies used only
individual factors as predictors (Earle and Sakova 2000; Hanley 2000;
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Robert and Bukodi 2000, 2004). Exceptions are the studies of Gerber (2001,
2004) and Gerber and Hout (1998), who showed that entry into self-
employment is higher in regions with higher unemployment rates, lower
crime rates and a bigger service sector. Yet their studies apply to Russia
only.
This limited focus on macro factors is surprising considering major
theoretical contribution in the field of entrepreneurship in post communist
studies. The market transition theory, the main theory on the transition
from state socialism to a market oriented economy (Nee 1989, 1991),
predicts an interplay between structural and individual characteristics. The
emergence of a market-oriented economy promotes human capital,
entrepreneurship and employment in private/hybrid sectors as the means
of economic success, while political credentials loose their beneficial
influence (Gerber and Hout 1998; Earle and Sakova 1999, 2000; Gerber
2001, 2004). Post-communist states differed with respect to the starting
conditions as well as the speed and shape of the transition. A cross-country
comparison of the development of self-employment can therefore sig-
nificantly increase our understanding both of general determinants of self-
employment and more specifically of the impact of the transition.
The aim of the paper is two-fold. Firstly, we extend market transition
theory with additional hypotheses on the impact of structural conditions on
the odds of being self-employed and on the applicability of individual
assets. Secondly, we empirically study the determinants of self-employment
in a cross-national manner, comparing four post-communist societies
(Bulgaria, Estonia, Hungary and Russia) at two time points (1996 and
2005). The number of countries does not allow the estimation of the effects
of country-level variables using hierarchical models. Instead we will
develop and test hypotheses on difference between the countries based
on the combined effect of their characteristics.

685
EUROPEAN SOCIETIES

2. Theory

Individuals on the labour market face three employment options: (i) self-
employment, (ii) wage employment, and (iii) unemployment. According to
the economic approach toward human behaviour, individuals choose the
alternative that is most beneficial to them. This approach of employment
choices is advocated by many scholars of self-employment (Rees and Shah
1986; Pfeiffer and Reize 2000; Osborn and Slomczynski 2005).
Unemployment is probably always less attractive than the other two
options. With respect to self-employment and wage employment, the
preferred order is less clear. Self-employment is generally regarded to be
more risky. If the business fails, individuals may loose their job, savings and
home. Self-employment also allows individuals to set their own schedule,
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to work whenever they like to, and it may even offer a way to become rich
(Blanchflower 2000). Given the ups and downs of self-employment, who
decides to enter this form of employment will depend on both individual
and structural characteristics. Furthermore, the impact of individual
characteristics is likely to depend on the structural context. Previous
research focused extensively on the impact of individual characteristics on
the entry into self-employment. This will therefore not be the focus of this
study, but we nevertheless start with a short overview of the findings in
previous research in order to be able to formulate hypotheses on differential
effects of human capital in different contexts.

2.1 Individual characteristics

Extensive evidence suggests that the level of education is the most


important individual characteristic affecting self-employment choices
(Rees and Shah 1986; Coate and Tennyson 1992; Blanchflower 2000;
Meager and Bates 2001; Gerber 2002; Wennekers 2006). According to
Gerber (2002) a higher education converts into a higher level of knowledge
and self-reliance, and is therefore related to a higher productivity.
Especially in self-employment higher productivity leads to higher
financial returns. Education is also a proxy of ambition, a strong
achievement orientation, risk taking and a higher value placed on
independence, which are believed to increase individuals motivation to
start their own business (Robert and Bukodi 2000; Gerber 2001, 2004).
Other forms of human capital may have effects that are similar to those
of education. Self-employed parents have specific skills, knowledge and
values that they may transfer to their children (Robert and Bukodi 2000,
2004). For these children the cost and risk of self-employment are thus
lower while the returns are higher. Furthermore, it is claimed that work

686
Self-employment in post-communist economies KARPINSKA ET AL.

experience gained in the past increases the odds of a self-employment


transition (Robert and Bukodi 2004). Especially work experience in an
occupation that is easily convertible into self-employment facilitates
becoming and staying self-employed.
Finally, the costs, risk and benefits of self-employment are related to age.
Many studies have confirmed that self-employed individuals are generally
older than their counterparts in wage employment (Aronson 1991). Yet, the
studies of self-employment in transitional economies contradict these
results. Gerber (2001, 2004) analyzing self-employment in Russia found
that younger people are more likely to become self-employed, because they
were more exposed to the new values and principles beneficial in a market-
oriented economy and facilitating self-employment.
Apart from all these pull factors that make self-employment more
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attractive, researchers also focused on factors that push an individual into


self-employment (Earle and Sakova 2000). One of these is the individual
experience of unemployment. When the possibility to find a new job is
limited it might be easier for an individual to start a small business than to
find a job (Pfeiffer and Reize 2000). However, long-term unemployment is
believed to lead to a decline of human capital and consequently to a
smaller likelihood to become a successful entrepreneur (Evans and
Jovanovic 1989; Hinz and Jungbauer-Ganz 1999; Blanchflower 2000).
The focus of this study is on the effects of macro conditions on self-
employment. We therefore restrict the individual level model to a few
variables, i.e., the level of education, age, and a few control variables.1

2.2 Macro conditions

The effects of macro conditions on self-employment decisions have been


studied far less often than those of individual characteristics. Macro
conditions can influence the likelihood to become self-employed in two
ways (Rees and Shah 1986; Coate and Tennyson 1992; Blanchflower 2000;
Gerber 2001, 2004; Wennekers 2006; Sauka 2008). First, directly by
changing the relative costs and benefits of self-employment. In this section
we will develop a hypothesis on these direct effects. Secondly, macro
conditions can moderate the effects of individual characteristics. That is,
under certain macro conditions the individual characteristics matter more
than under other macro conditions. This will be the topic of the next
section.

1. To our knowledge there are no datasets including several countries at more than one
point in time, with more extensive information on individual predictors of self-
employment.

687
EUROPEAN SOCIETIES

A first macro condition that may affect self-employment decisions is the


extent of privatisation. We expect that the more public properties are
transferred to private sectors, the more favourable the environment is
toward private initiatives (Djankov and Murrell 2002; Wennekers 2006).
Privatisation not only denotes the transfer of large enterprises into the
private sector but also the transfer of tens of thousands of retail and
service outlets to private parties, the so-called small privatisation (Hanley
2000). As suggested by Earle and Sakova (1999), privatisation policies also
affected the development of entrepreneurship in transition economies by
providing stability, enabling a better environment for investment deci-
sions, and making credit available for starting or expanding a business.
More advanced privatisation consequently lowers the costs of self-
employment.
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Secondly, in traditional economies a high level of unemployment (as the


proxy of poor economic development) is expected to hinder people from
entering self-employment (Pfeiffer and Reize 2000; Wennekers 2006). We
expect similar mechanisms to operate in transitioning countries. Low
unemployment at the country level is an indicator of good market
conditions, as there is a market for the goods and services offered by self-
employed and as a consequence the risk that their business fails is smaller
(Meager 1992; Hinz 2000; Pfeiffer and Reize 2000). Notice that the level
of unemployment in a country is expected to have an effect independently
from, and in the opposite direction, of individual unemployment.
Thirdly, we expect an influence of the level of corruption. Some
transition economies are characterised by a relatively high level of
corruption (Aidis 2005). Traditionally corruption is considered either to
grease or to sand the wheel (Meon and Sekkat 2005). According to the
first idea corruption is beneficial for self-employment because it acts as a
trouble-saving device when the bureaucracy is ineffective. As a conse-
quence, the efficiency of investments rise and the costs of self-employment
decline (Meon and Sekkat 2005). For example bribing the public officer
can speed up the procedure of entering the market. However, advocates of
the sanding the wheel idea claim that corruption impedes economic
growth and entrepreneurship (Chilosi 2001; Aidt 2009). A high level of
corruption may bring unforeseen costs, disproportionate to the expected
gains. Moreover, a higher level of corruption is a proxy of ill-implemented
regulations and unclear rules, further increasing the costs of self-
employment (Rona-Tas 1994, 2002; Chilosi 2001; Gerber 2001).
Combining these expectations, we hypothesise: H1: In countries and
periods with a more favourable structural context (higher levels of privatisa-
tion, lower levels of corruption and a lower rate of unemployment), the odds of
self-employment are higher.

688
Self-employment in post-communist economies KARPINSKA ET AL.

2.3 The interplay of macro conditions and individual characteristics

The main hypothesis from market transition theory is that human capital
becomes more important for economic success as the transformation
proceeds (Nee 1989). During communism economic success depended
strongly on political loyalty, but during and after the transformation, with
increasing privatisation, individual assets became the main determinants
of economic success. Such interplay between macro conditions and micro
characteristics is likely also important for the explanation of entrepreneur-
ship in general.
In line with the market transition theory, we assume that as privatisation
proceeds, human capital becomes a more important predictor of self-
employment. With respect to the effect of human capital, the post-
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communist societies will increasingly resemble market oriented economies.


Moreover, we expect that the level of unemployment within a country will
affect the way human capital can be utilised in post-communist economies.
Lower unemployment rates at the country level indicate a better functioning
market, in which it is more likely that human capital is an important
predictor of self-employment entry (Arum et al. 2000; Barbieri 2001).
Furthermore, if unemployment is high, push factors may become more
important, which have opposing effects to the pull factors. Unemployed
people, who are likely to have little human capital, may be pushed into self-
employment as the only option available (Pfeiffer and Reize 2000). As a
consequence, in periods with high unemployment pull and push effects
work together to create smaller effects of human capital on self-employment.
Finally, the impact of human capital on self-employment is likely to
depend on the level of corruption. The costs of productive self-employment
in a highly corrupted environment are high and economic success is
relatively unpredictable (Baumol, 1990; Rona-Tas 1994, 2002; Chilosi 2001;
Gerber 2001; Sobel 2008). In such an imperfect market, we expect human
capital to be a worse predictor of economic success than in markets that
function better.
Combining these expectations, we hypothesise: H2: In countries and
periods with a more favourable structural context (higher levels of privatisa-
tion, lower unemployment rates, and less corruption), the effects of human
capital on the odds of self-employment are higher.

2.4 Country differences in privatisation, unemployment and


corruption

The hypotheses stated above refer to the expected impact of different


structural contexts on employment decisions. The number of countries in

689
EUROPEAN SOCIETIES

our study is too low to test these hypotheses directly with the use of
hierarchical models. To estimate the effect of one country characteristics
at least 15 countries, and preferably more, are needed. We will therefore
apply an alternative strategy. We will compare the countries with respect
to the combination of the three macro conditions and investigate whether
the odds of self-employment and the impact of human capital vary in the
predicted way.
Privatisation in post-communist societies started between 1992 and
1995 (Bennet et al. 2004). At later stages of the transformation process all
countries began privatising their assets. Some modes of privatisation were
more favourable for self-employment than others (Bennet et al. 2004).
Bennet et al. distinguished three forms of privatisation: mass, full and
mixed. Mass privatisation means that firms were sold by giving vouchers
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or certificates to the population (applied in Russia). This form of


privatisation is regarded to most positively influence economic growth
(Bennet et al. 2004). Full privatisation means a direct sale of assets
(applied in Bulgaria, Estonia and Hungary). This was shown to have a less
positive effect on economic growth. Mixed privatisation refers to all other
forms of privatisation. The countries which applied mass privatisation are
expected to have more favourable conditions for self-employment than the
countries that applied full or mixed privatisation.
Countries differed less with respect to rates of unemployment. In
Bulgaria 13.5% of the labour force was unemployed in 1996. Unemploy-
ment levels in the other three countries ranged between 9.7 and 9.9. In all
countries unemployment was 23% lower in 2005. However, the
developments in between these 2 years were strikingly different. In
Bulgaria unemployment rose to 19.9% in 2001 and then dropped to 10.1.
Estonia and Russia show a rise of the unemployment level to 13% around
the turn of the century and a drop afterwards to 7.9 and 7.1, respectively.
In Hungary unemployment first dropped to 5.7% in 2001 and then rose
again to reach 7.1% in 2005. Bulgaria thus stands apart, not only because
of the higher level of unemployment in both years, but also because of the
very high unemployment in between.
With respect to corruption, for 1996 numbers are only available for
Hungary and Russia. According to the Transparency International report2
Russia scored 2.58 on a scale from 0 to 10 and Hungary 4.86. Low scores
indicate more corruption. Estonia and Bulgaria enter the database in 1998
with scores of, respectively, 5.7 and 2.9. Between 1996/1998 and 2005
little changed with respect to the corruption scores of Russia and Hungary.

2. Source: Transparency International 2001 (http://www.transparency.org/policy_


research/surveys_indices/cpi/2005, accessed 21-2-2012).

690
Self-employment in post-communist economies KARPINSKA ET AL.

In the same period the level of corruption dropped a little in Estonia (to a
score of 6.4) and considerably in Bulgaria (to 4.0).
Bulgaria thus faced the most severe obstacles towards self-employment,
especially in 1996, but to a lesser extent also in 2005. Estonia, Hungary
and Russia all show favourable scores on two of the three macro
conditions. Estonia and Hungary have relatively low unemployment and
relatively little corruption. However, they combine this with a less
favourable privatisation type. Unemployment in Russia is also relatively
low, and mass privatisation is expected to have a positive effect on self-
employment, however, corruption levels are high. From these macro
differences and the general hypotheses 1 and 2, we derive the expectation
that in Bulgaria (1) the odds of self-employment were lower, and (2) the
effect of human capital on self-employment was weaker than in the other
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three countries.
Over time, privatisation increased in all countries and unemployment
declined. In Bulgaria also the level of corruption was considerably lower in
2005 than in 1996. From the general hypotheses we derive the expectation
that: (1) the odds of self-employment will be higher in 2005 than in 1996
in all countries, and especially in Bulgaria, and (2) that the effect of human
capital on self-employment became stronger over time in all countries, and
especially in Bulgaria.

3. Methods

3.1 Data

The data we use in this study come from the International Social Justice
Project (ISJP) and the Generations and Gender Survey (GGS). The ISJP
dataset consists of a cross-sectional survey fielded in six post-communist
countries in 1996. The GGS is a panel study that also includes six post-
communist countries in its first wave in 2005. For our analysis of self-
employment we selected post-communist countries that participated in
both studies: Bulgaria, Estonia, Hungary and Russia.
The ISJP used a three stage random sampling scheme for most of
the countries and a two-stage random sampling scheme for Bulgaria. The
response rates varied between 67 and 95% (for a detailed overview of the
sampling procedure per country and the response rate see http://www.
butler.edu/isjp/intro.html). In each country around 1500 respondents
participated in an hour-long face-to-face interview.
The GGS is a panel survey of a nationally representative sample of the
1879-year-old resident population in each participating country. In each

691
EUROPEAN SOCIETIES

country around 10,000 respondents participated in face-to-face interviews,


and the response rate was between 44 and 72% (Vikat et al. 2007).
We selected respondents between 18 years old and retirement age, who
were active in the labour market (employed or self-employed).3 All
persons working in the agricultural sector were excluded, since it has been
argued that self-employment in this sector is driven by different
mechanisms (Gerber 2001). These selections resulted in a sample size
of 34,123. The numbers of missing values on the individual level variables
were low (never more than 6%) We deleted all cases with missing values.
The remaining sample size is 27,044.

3.2 Measurement
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3.2.1 Dependent variable: Self-employment has been identified with the


question: What is your current employment status? (in ISJP data) and
Are you self-employed (in the GGS data). Among all possible responses,
two represent self-employment: self-employment in trade or business, and
professional self-employment. These answers were combined into a
dichotomous variable self-employment (1 self-employed). The reference
category includes all other employment statuses.
3.2.2 Independent variables at the macro level: To capture possible
differences in self-employment choices across post-communist countries,
dummies representing each country were constructed. To account for
possible changes over time, a dummy representing year of the survey was
created (2005 being the reference). In order to investigate country specific
changes, the country and year dummies are combined (e.g., Bulgaria in
1996).
3.2.3. Individual level variables: Our indicator of human capital education is
indicated by the level of education completed. In the ISJP seven categories
are distinguished, according to the CASMIN system (Konig et al. 1988). In
the GGS seven categories are distinguished according to the ISCED
classification (UNESCO 2006). We recoded these categories into two
dummy variables: (i) secondary education and (ii) tertiary education. Those
who did not attain a secondary level of education are the reference category.
Age effects are measured with the variables age and age-squared.
We also include into the analysis: male, number of children and married
(compare Robert and Bukodi 2004). Table 1 shows descriptive information
on all variables for the four countries in the 2 time points.

3. In future analysis, it would be interesting to conduct a multinomial logistic regression


analysis with the unemployed as a third category, but due to sample size restrictions
this was not possible with our data.

692
Self-employment in post-communist economies KARPINSKA ET AL.

TABLE 1. Descriptives by country and year

ISJP 1996 GGS 2005

Obs Min Max Mean SD Obs Min Max Mean SD

Bulgaria 612 6764


Self-employment 0 1 0.083 0 1 0.082
Education
Less than 0 1 0.176 0 1 0.128
secondary
Secondary 0 1 0.377 0 1 0.594
Tertiary 0 1 0.438 0 1 0.276
Age 19 63 41.435 9.948 18 63 37.462 10.372
Male 0 1 0.516 0 1 0.460
Married 0 1 0.786 0 1 0.642
Number of 0 4 1.126 0.913 0 6 1.029 0.896
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children
Estonia 569 4647
Self-employment 0 1 0.083 0 1 0.087
Education
Less than 0 1 0.141 0 1 0.109
secondary
Secondary 0 1 0.605 0 1 0.541
Tertiary 0 1 0.255 0 1 0.350
Age 19 63 38.888 11.027 20 63 40.101 11.001
Male 0 1 0.508 0 1 0.384
Married 0 1 0.580 0 1 0.505
Number of 0 4 0.991 0.954 0 6 1.064 1.032
children
Hungary 371 7243
Self-employment 0 1 0.097 0 1 0.102
Education
Less than 0 1 0.472 0 1 0.118
secondary
Secondary 0 1 0.321 0 1 0.670
Tertiary 0 1 0.205 0 1 0.212
Age 18 60 38.881 10.223 18 63 37.982 10.405
Male 0 1 0.520 0 1 0.494
Married 0 1 0.663 0 1 0.592
Number of 0 5 1.146 1.022 0 7 1.108 1.074
children
Russia 776 6062
Self-employment 0 1 0.053 0 1 0.052
Education
Less than 0 1 0.089 0 1 0.048
secondary
Secondary 0 1 0.383 0 1 0.479
High 0 1 0.528 0 1 0.469
Age 18 60 38.679 9.994 18 60 38.571 10.401
Male 0 1 0.541 0 1 0.426
Married 0 1 0.656 0 1 0.560
Number of 0 4 1.035 0.906 0 7 0.974 0.864
children

693
EUROPEAN SOCIETIES

3.3 Analytical strategy

We will apply logistic regression models. The clustering of individual


cases at the country level is adjusted by always including country
dummies. We start with a model conducted on the pooled data of all
countries at both time points and including individual variables only. The
second model will be estimated using variables representing different
countries and time points. This model provides a first insight in the
hypothesis that specifies direct effects of macro characteristics on the
likelihood of self-employment. In a third model country specific changes
will be investigated by including interactions of year and country.
In the second set of models we include interactions between education
and the structural context. We start off with a model which includes the
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interactions between level of education and year. In the next model we


include the interaction between level of education and country. And in our
final model we test whether changes in the effect of education differ
between countries by including education times year times country
interactions.

4. Results

Among the four countries in our study, the likelihood to be self-employed


was highest in Hungary (10%) and lowest in Russia (5%). Bulgaria and
Estonia scored in between with 8% (Table 1). Changes between years are
very small in all four countries. These percentages can be the result of
both macro conditions and the composition of the population with respect
to characteristics that influence the likelihood of self-employment. In
order to investigate our hypotheses, we therefore turn to the results of our
models.
In the first model the effects of the individual level variables are shown
(Table 2). With respect to education results are in line with previous
studies. For all countries and the 2 time points together, we find a
significant positive effect of education. The odds of self-employment were
1.5 times as high for persons with secondary education than for those with
less than secondary education. Having tertiary education even increased
the odds 1.7 times.
The odds of self-employment also depended on the age of the
respondents. The likelihood to be self-employed increased until the age
of 40 (0.161/ 2* 0.002) and then decreased. These results are more in
line with a cohort effect (especially those who were young adults around
1990 are self-employed), than with a linear age effect.

694
TABLE 2. Logistic regression of being self-employed on individual characteristics, countries, and time (coefficients, standard errors, and odds
ratios)

Self-employment in post-communist economies


Model 1 Model 2 Model 3

Coef. SE OR Coef. SE OR Coef. SE OR


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Level of education
Less than
secondary (ref)
Secondary 0.394*** 0.081 1.484 0.369*** 0.081 1.446 0.374*** 0.082 1.453
Tertiary 0.527*** 0.085 1.693 0.611*** 0.085 1.842 0.616*** 0.086 1.852
Age 0.161*** 0.020 1.174 0.175*** 0.020 1.191 0.175*** 0.020 1.191
Age2 0.002*** 0.000 0.998 0.002*** 0.000 0.998 0.002*** 0.000 0.998
Male 0.770*** 0.047 2.159 0.771*** 0.047 2.162 0.771*** 0.000 2.162
Married 0.005 0.054 1.005 0.013 0.055 1.013 0.013 0.055 1.013
Number of children 0.057* 0.027 1.058 0.034 0.027 1.035 0.034 0.027 1.035
Countries
Russia (ref)
Bulgaria 0.540*** 0.070 1.716 0.542*** 0.074 1.719
Hungary 0.774*** 0.068 2.168 0.768*** 0.072 2.155
Estonia 0.620*** 0.075 1.858 0.618*** 0.079 1.855
Year
1996 0.090 0.084 0.914 0.106 0.172 0.899
2005 (ref)
Countries 1996
Russia (ref)

KARPINSKA ET AL.
Bulgaria 0.032 0.231 0.968
Hungary 0.110 0.251 1.116
Estonia 0.016 0.236 1.016
N 27044 27044 27044
Constant 6.645 0.376 0.001 7.417 0.389 0.001 7.417 0.389 0.001
695

Model x2 445.75 593.01 593.37


df 7 11 14

*p B0.05; **p B 0.01; ***p B 0.001.


EUROPEAN SOCIETIES

In line with results of previous research, we observe that the likelihood


of becoming self-employed was higher for men than for women. The
number of children did hardly influence the likelihood of self-employment
and we do not find differences between married and unmarried
individuals.
With Model 2 we investigate whether self-employment was more
common in certain post communist countries than in other. Furthermore,
we test whether the likelihood of being self-employed changed over time.
We find significant differences in the level of self-employment between
the countries (tested with different countries serving as a reference
category). Taking individual level characteristics into account, the odds of
self-employment in Hungary were 2.2 times the odds of self-employment
in Russia (the reference category). In Estonia the odds were 1.9 times
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higher than in the reference category, while in Bulgaria they were 1.7
times higher. We expected Bulgaria to have the lowest odds of self-
employment, because the macro conditions in Bulgaria were more adverse
to self-employment than in the other three countries. Instead we find that
Russia is the outlier with clearly lower levels of self-employment than the
other countries. Compared to Hungary, however, in Bulgaria the odds of
self-employment are significantly lower.
Model 2 also includes a dummy variable distinguishing 1996 from 2005.
Our hypothesis that self-employment became more common when the
transformation proceeded, is not supported; the odds of self-employment
in 1996 were not significantly different from those in 2005.
In Model 3 we investigate country specific trends in self-employment.
We expected that especially in Bulgaria there would be an increase of self-
employment, because both unemployment and corruption dropped.
However, none of the countries deviates from the general pattern. In all
countries the odds of self-employment in 2005 are the same as the odds in
1996.
Table 3 shows the results of models including interactions between
education and the countries and time. We do not present the interactions
themselves but instead the country and year specific effects of education.
For example the effect of secondary education in Bulgaria (Model 5) is
0.502. This means that in Bulgaria the odds of self-employment for
individuals with secondary education were 2.65 times the odds of those
with less education. The effect was calculated by adding the main effect
(0.217, the effect for Russia) and the interaction effect for Bulgaria
(0.719, not presented in the table).
In Model 4 we observe that the effect of education did not significantly
increase over time. Increasing privatisation, somewhat lower levels of
unemployment, and lower corruption  albeit not in all countries  did

696
TABLE 3. Logistic regression of being self-employed: country and period specific effects of education (coefficients, significance levels, and
odds ratios)

Self-employment in post-communist economies


Coef. OR Sign. Coef. OR Sign. diff. Coef. OR Sign. diff. Coef. OR Sign. diff.

Model 4 2005 (ref.) 1996


Level of education
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Less than
secondary (ref)
Secondary 0.345 1.412 *** 0.451 1.570
Tertiary 0.561 1.752 *** 0.973 2.646
Model 5 Russia (ref.) Bulgaria Hungary Estonia
Level of education
Less than
secondary (ref)
Secondary 0.217 0.805 0.502 1.652 ** 1.063 2.895 *** 0.322 0.725
Tertiary 0.033 1.034 0.664 1.943 ** 1.218 3.380 *** 0.213 1.237
Model 6 Russia 2005 (ref.) Bulgaria 2005 Hungary 2005 Estonia 2005
Level of education
Less than
secondary (ref)
Secondary 0.184 0.832 0.478 1.613 ** 1.019 2.770 *** 0.317 0.728
Tertiary 0.037 0.964 0.639 1.895 ** 1.189 3.284 *** 0.166 1.181
Model 6 continued Russia 1996 Bulgaria 1996 Hungary 1996 Estonia 1996
Level of education
Less than

KARPINSKA ET AL.
secondary (ref)
Secondary 0.600 0.549 0.710 2.034 ** 1.626 5.083 *** 0.434 0.648
Tertiary 0.490 1.632 0.858 2.358 1.310 3.706 0.564 1.758

*p B 0.05; **p B 0.01; ***p B 0.001: for Russia and 2005 (the reference categories) the significance refers to the main effect of education, for all other
countries and for 1996 the significance refers to the difference between the educational effect in this country or year and the educational effects in the reference
697

category.
All models include the following main effects: age, age2, male, married, number of children, country, year.
Model fit Model 4: x2 597.10, df  13; model fit Model 5: x2 645.16, df  17; model fit Model 6: x2 656.25, df  25.
EUROPEAN SOCIETIES

not coincide with an increase in the effect of education on the likelihood of


self-employment.
In Model 5 the countries are compared and clear differences are visible.
In Russia and Estonia the likelihood to be self-employed is not
significantly different between educational groups. This aspect of human
capital does not play a role in predicting who becomes self-employed and
who not. In Bulgaria the odds of self-employment of men and women with
secondary education are 1.7 times as high as those with less education and
the odds of persons with tertiary education are 1.9 times as high. In
Hungary the differences between the educational groups seem even bigger
(odds ratios of 2.9 and 3.4), but the difference with Bulgaria is not
significant.
Our expectation of a general increase in the importance of human
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capital for the likelihood of being self-employed has already been refuted
by the results of Model 4. Model 6 shows that single countries do not
show the expected trend either. If any change occurred, than it was in the
opposite direction: effects of education were stronger in 1996 than in 2005
(only significant in Hungary).

5. Discussion and conclusions

In this study we investigated which factors affected the odds of being self-
employed during the transition from a planned to a market economy in
post communist societies. The focus of our analyses was on the structural
context in which individual decisions to become and stay self-employed
were embedded. In line with our expectations, individuals take the
decision to enter self-employment or to stay self-employed not only on the
basis of their individual resources, but their decisions are shaped by
structural possibilities and obstacles.
We hypothesised that higher levels of (mass) privatisation create more
possibilities for entrepreneurship, not only because of the transfer of
public property to the private sector, but also because at the beginning of
the transition, the legal systems were often inadequate to guarantee private
proprietorship and individual commercial autonomy. Moreover, we
expected that a lower level of corruption would stimulate private economic
activity, by lowering the operating costs. And we expected that in countries
with a low unemployment rate, more individuals would choose to become
self-employed. We were not able to directly test the influence of macro
conditions, but a careful examination of the empirical results indicates
which conditions played a more important role than others.
With respect to the likelihood of self-employment, we find a clear
divide between Russia and the other three countries. The main reason why

698
Self-employment in post-communist economies KARPINSKA ET AL.

we did not expect this divide is that Russia was characterised by mass
privatisation. This type of privatisation was thought to be favourable for
self-employment, because (parts) of firms were directly transferred to the
population. It may be that mass privatisation was successful on the short
term, but its effect is not visible in 1996 or 2005. Instead, the high
corruption in Russia may be the main barrier towards self-employment.
Aidis and Adachi (2006) already indicated that Russia faced severe
structural obstacles towards entrepreneurship (high corruption, entry and
exit barriers, and lack of rules of law).
The self-employment level in Bulgaria, on the other side, is
unexpectedly high given the unfavourable conditions for self-employment
in this country. But this finding is also less surprising if the effect of mass
privatisation would be weak or non-existent. Both unemployment and
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corruption dropped in Bulgaria over the years, making this country more
equal to Hungary and Estonia, the countries with the highest levels of self-
employment in our study.
Furthermore, our results suggest that after the first years of the
transition had passed, the mechanisms steering self-employment in post-
communist economies and market-oriented economies are not becoming
more similar. This result points again to the importance of corruption.
With corruption scores around 5 (and even worse for Russia), the countries
in our study score still much lower than the scores of Western European
countries that are 8 and 9. And with the exception of Bulgaria, corruption
levels did not drop significantly between 1996 and 2005. The development
of propriety rights and clear rules of law are a necessary starting point, not
only to weaken the entry barriers into self-employment, but also to increase
the influence of human capital on exactly that entry process (Arum et al.
2000; Hinz 2000; Pfeiffer and Reize 2000; Barbieri 2001).
The most puzzling finding of our study is the very weak to non-existent
effect of education on self-employment in Estonia. In this respect Estonia
does not differ much from Russia. However, with respect to corruption,
type of privatisation and level of self-employment Estonia is much more
similar to the three other countries. Future research could investigate
whether this similarity has cultural reasons. Dinello (1998, 1999) suggests
that Russian culture is opposite to the homo economicus which might
hamper the transition to a market economy. Estonia has a large Russian
minority.
Although our findings shed more light on the determinants of self-
employment, we need to be careful with drawing more general conclusions
based upon these results. The number of countries was too small to
estimate hierarchical models including country characteristics as variables.
Our solution was to compare individual countries. If data on more
post-communist economies would be available, entering the country

699
EUROPEAN SOCIETIES

characteristics themselves into the analyses would be possible, and


consequently, more informative results could be obtained. In that way
stronger conclusions about the causes of differences between particular
post-communist countries could be drawn. Clearly, the possible relation
between a more favourable environment and the applicability of individual
resources deserves further research.

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Kasia Karpinska studied sociology at Utrecht University and is currently


working as a PhD student at Utrecht University School of Economics
and the Netherlands Interdisciplinary Demographic Institute (NIDI). Her
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research interests cover self-employment, labour market participation


of older workers, and employers behaviour toward older workers.

Ineke Maas is associate professor in the Department of Sociology/ICS,


Utrecht University, the Netherlands. Her main research interests are
international and historical comparisons of career, intergenerational, and
marital mobility. In addition, she has published on the integration of
immigrants, inequality of educational opportunities, and gender inequality.

Wim Jansen is assistant professor at the department of Methodology &


Statistics, and a member of the Interuniversity Center for Social Science
Theory and Methodology (ICS) of the Social Science Faculty, Utrecht
University. His research interests include social stratification and
inequality.

Address for correspondence: Kasia Karpinska, Department of Law,


Economics and Governance, Utrecht University School of Economics,
Postbus 80125, 3508 TC Utrecht, The Netherlands.
E-mail: k.karpinska@uu.nl

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