Labour Market Regulation and Business Entry

Abstract

Regulation of labour markets is often viewed as being hostile to entrepreneurship. Several studies investigate the effects of labour market institutions on entrepreneurship in terms of self-employment but there is a relatively small number of international studies relating labour market institutions to business creation. This paper empirically investigates the impact of labour market institutions (the bargaining power of trade unions, unemployment benefits and labour income taxation) on business entry in chosen OECD countries over the period 1995-2007. To take into account a specific structure of time-series cross-section data, the regression equation that explains business entry is estimated by two alternative approaches: the feasible generalized least squares approach proposed by Parks (1967) and the panel corrected standard errors approach proposed by Beck and Katz (1995). The regression analysis gives mixed results about the impact of union bargaining power, unemployment benefits and labour income taxation on business entry. The business entry rate is negatively associated with obstacles to getting a credit and the size of country’s population, but positively associated with trade openness.