Involuntary entrepreneurship – Evidence from Thai urban data

•We structurally estimate a model of “involuntary entrepreneurs”, voluntary entrepreneurs and wage workers.•Involuntary entrepreneurs could earn higher income in wage work but lack access to it because of labor market frictions.•We estimate that 19% of the businesses in our Thai urban household data are involuntary.•The involuntary entrepreneurs earn much lower income than the voluntary and are likely to have low wealth and schooling.•Addressing involuntary entrepreneurship requires policies that directly target labor market frictions in the wage sector. We structurally estimate a model of occupational choice between wage work and entrepreneurship which allows for ‘involuntary entrepreneurship’ (running a business out of necessity). Involuntary entrepreneurs would earn higher income as workers but cannot access a wage job because of labor market frictions. Using Thai urban household data, we estimate the share of involuntary entrepreneurs as 19% of all businesses in our sample, with robustness runs yielding a range from as low as 7% to as high as 25%, depending on the data stratification and empirical specification. Involuntary entrepreneurs earn significantly lower income (85% less on average) than the rest of the entrepreneurs and are more likely among low-wealth and low-schooling households. Decomposing the estimated effects of the labor and credit market frictions, our results imply 18.7% excess (involuntary) entrepreneurs because of labor market frictions and 0.6% fewer entrepreneurs because of credit frictions, both relative to the unconstrained optimum. Counterfactual policy evaluations show that involuntary entrepreneurship can only be reduced by directly targeting labor market frictions, with attention paid to the equilibrium effect on the market wage.