The Entry and Exit Dynamics
of Self-Employment in Canada*
Small Business Economics
15: 105–125, 2000.
2001 Kluwer Academic Publishers. Printed in the Netherlands.
ABSTRACT. This paper documents the extent and cyclicality
of self-employment entry and exit flows; explores transitions
to and from self-employment; and investigates the influence
of individual characteristics and labor market experience as
well as macroeconomic conditions on the probability of
moving into or out of self-employment.
The self-employed sector now employs over two and a half
million Canadian workers, has expanded on average by over
4% in the 1990s and accounted for over three out of every four
new jobs the economy has created. There are substantial flows
both into and out of self-employment over the last 15 years.
Gross flows into and out of self-employment averaged nearly
half a million per year between 1982 and 1994, amounting to
42% of the total self-employed population.
Regression results reveal no statistical evidence supporting
the dominance of the push hypothesis over the pull hypoth-
esis – the notion that people are increasingly pushed into self-
employment by deteriorating economic conditions. This
analysis is done both through time-series analysis and the
analysis of the determinants of flows into (and out of) self-
employment. As in paid employment, younger Canadians are
subject to higher turnover in self-employment – they are not
only more likely to enter but also substantially more likely to
leave self-employment. Prior paid-employment experience and
prior self-employment experience are both found to be asso-
ciated with a higher likelihood of entering self-employment.
The longer one is self-employed, the less likely he/she is going
to leave the business. Having a spouse in business (being self-
employed) substantially increases the likelihood of the other
spouse becoming self-employed – a self-employed spouse
often attracts the other to either join the family business or
start their own. We also find evidence that steady family
income through paid-employment from one spouse increases
the self-employed’s (the other spouse’s) affordability to
continue with the business venture and hence reduces the like-
lihood of leaving self-employment.
The objectives of this paper are to i) document the
extent and cyclical variations of self-employment
entry and exit; ii) explore transitions to and from
self-employment; and iii) investigate the influence
of individual characteristics and labor market
experience as well as macroeconomic conditions
on the probability of moving into or out of self-
The motivation for this research arises from the
increasing importance of self-employment, not
only in Canada but also in many other countries.
Nearly two and a half million Canadians reported
working at their own businesses in 1997, more
than double the number of self-employment
twenty years ago. This unprecedented growth in
Canadians’ entrepreneurial endeavor in the 1990s,
especially during a period of very slow growth in
paid employment (a mere average 0.2% per
annum), has been receiving increasing attention
from the media, policy analysts, and academic
Given the numbers, this is not surprising. Self-
employment accounted for 16.2% of the labor
force in 1997, up from 12.8% in 1989, and 12.2%
in 1979. Presented in terms of job creation, the
statistics command one’s attention. In the first
eight years of the 1990s, the labor market
expanded by a total of 775 thousand jobs (5.9%).
Of this total net job growth, over three-quarters
(nearly 600 thousand or 77.2%) were created in
the self-employed sector. This contribution to job
creation from self-employment is unprecedented.
Final version accepted on January 18, 2000
Labour and Household Surveys Analysis Division
Business and Labour Market Analysis (BLMA) Division
Economic Studies and Policy Analysis Division