The Impact of Unemployment on New Firm Formation in Finland

Abstract

HANNU TERVO AND HANNU NIITYKANGAS ARE BOTH employed at the Centre for Economic Research in Central Finland, University of Jyvaskyla, Finland. There is an a priori case that unemployment can either increase or decrease new firm formation. This paper analyses how unemployment has affected entrepreneurship in Finland where, after a sustained period of increase, new firm formation began to fall during the recession. The empirical analysis is based on the application of various statistical methods on regional data on unemployment, new firm formation and other factors. Two hypotheses based on the 'push-pull' model are derived. The decision to start a new firm is treated as a form of human capital investment problem. At regional level, high unemployment is shown to promote firm formation. These relationships are strenghtened if the effect of other factors is eliminated. Especially in the case of those regions where both the opportunities for entrepreneurship and the entrepreneurial qualifications of the population are good, a rise in unemployment will promote new firm formation.