The Income of Self-employed workers in Chile: Comparing income distributions

In the previous post about the income of self-employed workers compared with the income of salaried ones we pointed out that it could be useful to compare not only averages: That self-employed workers could have a higher probability to reach high incomes than salaried workers at the same educational level. A worker with low educational level could reach a ceiling in their incomes that a self-employed worker could surpass. 

Since we are analyzing the variability of incomes, why focus on higher incomes? (for a general analysis of inequality of incomes in Chile you can see this link). One relevant reason is based on the subjectivity of actors: It is quite common that people think of themselves as above average, so their hopes are not based in reaching the average income, but to surpass it. Then, when they decide to pursue self-employment more than averages they could be more interested in compare the income of people who was successful (since they expect to be successful also). Since self-employed workers probably are even more hopeful than other workers -they need a high confidence in their own abilities to pursue that kind of work- it is interesting to see if that gamble do have some grounds to be believed. We are doing, in the end, the comparison that self-employed workers could be more interested.

Actually, this analysis was prompted by qualitative interviews with self-employed workers of low educational level that said that they simply could not get their present incomes if they were salaried (‘no employer could pay me, with primary education, what I can get as self-employed’). The idea of this post is to check if that idea is correct.

Anyway, what the data of the CASEN says?

Educational Level Salaried Workers Self-employed Difference
75th   Percentile 95th   Percentile 75th   Percentile 95th   Percentile 75th   Percentile 95th   Percentile
No education 221.000 331.500 308.100 616.200 39% 86%
Incomplete Primary 198.900 323.765 337.526 616.200 70% 90%
Complete Primary 221.000 353.600 376.671 718.900 70% 103%
Incomplete Secondary 243.100 419.900 410.800 821.600 69% 96%
Incomplete Secondary (technical) 276.250 552.500 496.417 1.129.700 80% 104%
Complete Secondary 304.985 552.500 513.500 1.038.110 68% 88%
Complete Secondary (technical) 331.500 574.600 616.200 1.334.135 86% 132%
Incomplete Tertiary 419.900 884.000 718.900 2.054.000 71% 132%
Complete Tertiary 884.000 1.989.000 1.232.400 4.108.000 39% 107%

Source: CASEN 2009 (Chilean pesos of december 2009, 1 dollar = 501 pesos)

The data show that the advantage of self-employed workers, at the same educational level, is even higher in high percentile than if we compare average incomes. We did the comparison in 75th percentile (basically what we can name moderate optimism: the idea that you can reach the income of the superior 25% of people) and the comparison in 95th percentile (high optimism, the idea that you will one of the ‘winners’)

Regarding 75th percentile, we find that the self-employed advantage is around 70% and 80%. Only in the extreme educational levels (the lowest and the highest) the advantage is lower, and actually lower than the average advantage. In the case of self-employed workers with complete tertiary education we can note that the income of 75th percentile is lower that the average income, a consequence of the highly skewed distribution of incomes in that group.

If we analyze the 95th percentile, we find that for all groups the advantage of self-employed workers is quite high: in several cases even doubling the income of salaried workers, and at least an 80% higher. In fact, the income of 95th percentile of self-employed workers with no education is around the level of 95th percentile of salaried workers with complete secondary education. And, even more, the income of 75th percentile of self-employed workers is, for several educational levels, around the level (or even higher) of the income of 95th percentile of salaried workers.

In other words, the advantage of income for self-employed workers is even higher for high percentile of income distribution. For a given educational level   you reach a ceiling in your income if you are salaried that can be broken if you are self-employed.


The income of the Self-employed in Chile

It is quite common in discussions about social policy or about labour in Chile, to think about self-employed workers as disadvantaged, or at least, vulnerable ones. There is some assumption that salaried work is better than self-employment. And, sometimes, self-employment is treated as synonymous, or at least necessarily part, of the informal sector -and again, that sector is treated as a lower sector.

But, although, it is clear that for some self-employed those descriptions are true, it is also true about some salaried workers: There are self-employed and salaried workers in vulnerable and disadvantaged positions, but that does not necessarily describe the situation for all of them.

Since the CASEN 2009 (Encuesta de Caracterización Socioeconómica Nacional, National Survey of Socioeconomic Characterization) was released some time ago, we can use that data to analyze this situation. The sample of the CASEN is very large (45130 homes and 246924 persons in the 2009 version), since it is intended to give information on almost all municipalities in the country). For a description of the survey, see the description in the Mideplan website.

And what the data says?

The following table shows the monthly average income (for main job) in diverse kind of jobs.

Table I. Income of Main Job by Category

Income Main Job
Salaried Workers 342.222
Self-employed (without counting employers) 474.625

Source: CASEN 2009. (Chilean pesos of december 2009, 1 dollar = 501 pesos)

Self-employed workers have greater incomes than salaried workers (only public sector salaried jobs have income around the average self-employed worker). It is important to note that we are not counting employers in our average of self-employed, were we to do that the difference could be quite larger.

In other words, we can simply talk about self-employed workers as having a more disadvantaged situation. Their more unsecure and variable working conditions are compensated with larger incomes. In other words, it is not possible  to say that salaried jobs are better than self-employment.

But there is another twist to that situation. Self-employed workers have a lower educational level than salaried ones. And in Chile, income have a large association with education . The CASEN data is quite telling at this:

Figure I. Average monthly income by Years of Education (in pesos, December 2009)

Average income by years of education in Chile (CASEN 2009)Source: CASEN 2009

But, as we already said, self-employed workers do have less education than other workers: 31% of people with incomplete primary education is self-employe compared with only 12% of people with complete tertiary education. So, how it is possible that self-employed workers do have larger average incomes?

To analyze in more detail the relationship between the incomes of salaried and self-employed workers, we should keep education level constant. If we do that, we find that, for the same education level, the incomes of self-employed people are very large compared with salaried. The aggregate advantage hid the level of the advantage, since self-employed workers are more common at lower educational levels (with lower average incomes)

Table II. Income of Main Job by Educational Level

Salaried Self-employed Difference Difference (in %)
Educational Level
No education 185.288 237.116 51.828 28%
Incomplete primary 179.076 261.699 82.623 46%
Complete primary 195.880 299.148 103.268 53%
Incomplete Secondary 211.192 336.612 125.420 59%
Incomplete Secondary (technical) 248.746 388.831 140.084 56%
Complete Secondary 259.629 430.083 170.453 66%
Complete Secondary (technical) 272.277 483.677 211.400 78%
Incomplete Tertiary 343.228 580.262 237.033 69%
Complete Tertiary 716.524 1.293.967 577.443 81%
Educational Level (grouped)
Incomplete Secondary or lower 198.992 301.714 102.722 52%
Complete Secondary 263.406 443.425 180.020 68%
Tertiary 610.843 1.052.538 441.695 72%

Source: CASEN 2009. (Chilean pesos of december 2009, 1 dollar = 501 pesos)

Self-employed workers usually, at the same educational level, have main job incomes at least 50% higher than salaried. The difference is even larger in the higher education levels.   But it is relevant also in lower educational levels: A self-employed worker with incomplete primary education has an income very similar to a salaried worker with complete secondary education.

There is a point that we will not develop here, it will be a matter of a second post: For a person with low education their only way to reach high incomes is through self-employment. The averages are higher, but the largest income that they can reach (or, let say, the income at the 75 percentile) is quite higher and unreachable for salaried workers at their education level. That can be quite relevant for people who decide to go for self-employment, and that possible have, warranted or not, a high confidence in their abilities.