The Impact of Labour Market Regulations on Entrepreneurship: The Case of Germany

Abstract

This paper explores the impact of German labour market regulations on the willingness of young labour market entrants to start their own business rather than just becoming an employee. We study the legal situation, the actual and perceived constraints imposed on businesses and the actual flexibility available to young/small businesses. We find strong evidence that labour market regulations are often misperceived in Germany and that these misperceptions distort the willingness to become self-employed. Start-ups are de jure hardly affected by labour market regulations because of a large number of exemptions for small businesses and they are able to use a number of functional flexibility measures and thereby avoid regulatory restrictions, but perceptions are quite the opposite, particularly in legal areas with high media coverage. This leads to a strong reluctance to consider starting a business at a very early stage. Thus, measures aiming at increasing entrepreneurship should place strong emphasis on accurate knowledge of regulatory constraints and, particularly in Germany less sceptical media coverage.