Does self-employment reduce unemployment?
Section snippets
Executive summary
Entrepreneurship has become increasingly important to developed countries as a source of economic growth and employment creation. As public policy has turned to entrepreneurship to generate employment and economic growth, policy makers have turned to the scholarly literature for guidance about the appropriate approach and context. However, while seeking guidance about the appropriate role for entrepreneurship policy, policy makers have been befuddled with ambiguous results at best.
The
Linking self-employment to unemployment
As discussed previously, there may be both a (positive) effect of unemployment on self-employment (the “refugee” effect) and a (negative) effect of self-employment on unemployment (the “entrepreneurial” effect). And both possibilities have been studied theoretically and empirically. The “entrepreneurial effect,” however, requires some further analysis.
Why an increased amount of entrepreneurial activity should have an impact on unemployment? The economics literature on Gibrat's Law provides one
Measurement issues
Following Storey (1991), we operationalize entrepreneurial activity in terms of the number of self-employed. More precisely, we use the change in the number of non-agricultural self-employed (unincorporated as well as incorporated) as a fraction of the labour force. This measure has two significant advantages: First, while not being a direct measure of entrepreneurship, it is a useful and well-established proxy for entrepreneurial activity (Storey, 1991). Second, it is available for a large
Model and method
The previous sections explain why the dynamic interrelationship between changes in self-employment and unemployment is complex, and, in particular, why the direction of causality between the two variables is not clear a priori. The previous sections suggest two testable hypotheses — that increases in self-employment rates lead to a decrease in subsequent unemployment, and that increases in unemployment rates lead to an increase in subsequent self-employment. In order to evaluate the causal
Empirical results
Estimation results for the two-equation VAR model consisting of Eqs. (6), (7) are reported in Table 2.13
Conclusions
The small business sector, and hence self-employment, has become increasingly important to modern OECD economies as they attempt to generate economic growth and employment. New and small firms have emerged as a major vehicle for entrepreneurship to thrive (Audretsch and Thurik, 2001). The present paper shows the important role that changes in self-employment can play in reducing unemployment.
As public policy turned to entrepreneurship to generate employment and economic growth, policy makers
Acknowledgement
This paper is the result of a series of visits by David Audretsch as a Visiting Research Fellow at the Tinbergen Institute; by Roy Thurik and Martin Carree as Ameritech Research Scholars at the Institute for Development Strategies, Indiana University; and by André van Stel and Roy Thurik to the Max Planck Institute of Economics in Jena, Germany. Martin Carree is grateful to the Royal Netherlands Academy of Arts and Sciences (KNAW) for the financial support. The authors acknowledge the comments
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