Unemployment and new business formation – new insights into a complex relationship

ABSTRACT

The article analyses the interrelation between unemployment and new business formation using panel data for a large cross-section of countries. We find robust evidence for a positive influence of unemployment, domestic credit to the private sector and business-friendly regulation on new business formation. Our examination does, however, indicate no support for the view that new business formation significantly reduces national unemployment rates.

KEYWORDS:

• Unemployment
• new business formation
• dynamic panel data analysis
• cross-country analysis

JEL CLASSIFICATION:

• M13
• J64
• O15

Acknowledgement

Andrea Vaona passed away – much too early – in August 2016. I thank Andrea for many years of friendship and intellectual inspiration. He made most important contributions to this paper, but could not take part in the final revisions. In sorrow, I dedicate this work to his memory. (Dirk Dohse)

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Doingbusiness.org and World Development Indicators, respectively.

² The Knowledge Spillover Theory of Entrepreneurship suggests that investing in new knowledge by incumbent firms or research institutes creates positive spillovers that generate entrepreneurial opportunities and thereby tends to increase new business formation.

³ The minimum wage ratio is defined as the ratio of the minimum wage to value added per worker.

⁴ Audretsch, Dohse, and Niebuhr (2015) show that not only the unemployment rate per se but also the share of long-term unemployed might affect entrepreneurship.

⁵ In so doing, we face a trade-off, as the two equations are estimated on slightly different country sets: The unemployment equation includes observations for Morocco and Portugal, but not for India which is, instead, included in the NBD equation. This happens because instrument sets differ over the two equations for NBD and unemployment, not including lags of dependent variables to avoid endogeneity and weak instruments.

⁶ Additional results are available from the authors upon request.

⁷ In some model specifications, population growth and R&D expenditure are significant as well. As these results are, however, not robust, they are not discussed in the main text.

⁸ First-order serial correlation tests are not reported, as absence of first-order serial correlation is not a condition for consistency of the estimates (Arellano 2003).

⁹ We also ran poolability tests for OECD countries versus non-OECD countries and for the years before and after 2007, finding that poolability (the null that the coefficients of the interaction terms are zero) is never rejected at a 5% level.

¹⁰ In single countries, the impact of NBD on unemployment might well be significant. Hence, our results do not contradict other studies, finding significant impacts in single countries.