1 Does Entrepreneurship Reduce Unemployment ?

The relationship between unemployment and entrepreneurship has been shrouded with ambiguity. On the one hand, one strand in the literature has found that unemployment stimulates entrepreneurial activity, which has been termed as a “refugee effect”. On the other hand, a very different strand in the literature has identified that higher levels of entrepreneurship reduce unemployment, or what has been termed as a “Schumpeter effect”. Taken together, these two relationships result in considerable ambiguities about the relationship between unemployment and entrepreneurship. The purpose of this paper is to try to reconcile these ambiguities by introducing a two-equation model, where changes in unemployment and in the number of business owners are linked to subsequent changes in those variables. The model is tested for a panel of 23 OECD countries over the period 1974-1998. The empirical results confirm the two distinct and separate relationships between unemployment and entrepreneurship, i.e. “Schumpeter” and “refugee” effects.