The role of economic policy uncertainty in the US entrepreneurship-unemployment nexus

Abstract

Purpose– The purpose of this paper is to extend the literature on the entrepreneurship-unemployment nexus to include the role of economic policy uncertainty in the causal dynamics.Design/methodology/approach– The study utilizes the Toda-Yamamoto causality tests of a vector autoregressive (VAR) model to infer the causal dynamics between the self-employment rate (SER), the unemployment rate (UR), industrial production (IP), and the economic policy uncertainty index (EPUI) in the case of the USA. In addition to the examination of the causal dynamics, generalize impulse response analysis is undertaken to examine the role of unexpected shocks to the current and future behavior of the variables specified in the VAR model.Findings– The results reveal unidirectional causality from the SER, IP, and the EPUI to the UR. An increase in the SER and IP lowers the UR while an increase in the EPUI raises the UR. The findings also show unidirectional causality from the EPUI to IP in which an increase in the EPUI reduces IP.Research limitations/implications– Due to data availability for higher frequency monthly data, the self-employment data limits the analysis to 2000:1 to 2014:11.Practical implications– The results reiterate the importance of minimizing economic policy uncertainty as a means to facilitate effective planning by entrepreneurs and economic agents. Moreover, policies designed to encourage entrepreneurship (self-employment) aids in the reduction of unemployment.Social implications– Policies designed to encourage entrepreneurship also facilitate the reduction in the UR. Also, greater policy transparency and stability has a positive impact on entrepreneurial activities.Originality/value– This is the first study to incorporate the role of economic policy uncertainty in the examination of the causal dynamics between entrepreneurship and unemployment.