DP5057 Does Self-Employment Reduce Unemployment?

Author(s): David B Audretsch , Martin A Carree , A R Roy Thurik , A J van Stel

Publication Date: May 2005

Date Revised: October 2008

Keyword(s): unemployment , self-employment , entreprenuership

JEL(s): J23 , J64 , L26 , L53 , M13 , O11

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP5057.asp

This paper investigates the dynamic relationship between self-employment and unemployment rates. On the one hand, high unemployment rates may lead to start-up activity of self-employed individuals (the 'refugee' effect). On the other hand, higher rates of self employment may indicate increased entrepreneurial activity reducing unemployment in subsequent periods (the 'entrepreneurial' effect). This paper introduces a new two-equation vector autoregression model capable of reconciling these ambiguities and estimates it for data from 23 OECD countries between 1974 and 2002. The empirical results confirm the existence of two distinct relationships between unemployment and self-employment: the 'refugee' and 'entrepreneurial' effects. We also find that the 'entrepreneurial' effects are considerably stronger than the 'refugee' effects.