31/3/2013: Entrepreneurship and the Great Recession

Staying on the theme of 'catching up with my reading' today - a very interesting paper by Fairlie, Robert W., "Entrepreneurship, Economic Conditions, and the Great Recession" (February 28, 2013). CESifo Working Paper Series No. 4140.

From the abstract:

"The “Great Recession” resulted in many business closings and foreclosures, but what effect did it have on business formation?

On the one hand, recessions decrease potential business income and wealth, but on the other hand they restrict opportunities in the wage/salary sector leaving the net effect on entrepreneurship ambiguous.

The most up-to-date microdata available -- the 1996 to 2009 Current Population Survey (CPS) -- are used to conduct a detailed analysis of the determinants of entrepreneurship at the individual level to shed light on this question.

• Regression estimates indicate that local labor market conditions are a major determinant of entrepreneurship. 
• Higher local unemployment rates are found to increase the probability that individuals start businesses. [Note: authors do not control for quality of entrepreneurship, e.g. survivorship rates for entrepreneurial ventures founded by 'forced' entrepreneurs out of unemployment spells]
• Home ownership and local home values for home owners are also found to have positive effects on business creation, but these effects are noticeably smaller. 
• Additional regression estimates indicate that individuals who are initially not employed respond more to high local unemployment rates by starting businesses than wage/salary workers. The results point to a consistent picture – the positive influences of slack labor markets outweigh the negative influences resulting in higher levels of business creation. Using the regression estimates for the local unemployment rate effects, I find that the predicted trend in entrepreneurship rates tracks the actual upward trend in entrepreneurship extremely well in the Great Recession."

Wait, what was that about 'home ownership' and 'local home values'? Sure this is not suggesting that negative equity might have an effect on entrepreneurship? Irish Government & our 'Green Jerseys' say that it only matters when one decides to move...

See three posts from 2010 that I wrote on the topic of Negative Equity effects in Ireland: Post 1, Post 2 and Post 3) and another link from 2010 on the topic of Negative Equity and entrepreneurship (here).