The dynamics of causality between entrepreneurship and employment

This paper examines the dynamic inter-relationship between different measures of entrepreneurship - business ownership rates and entry rates - and unemployment rates for Portugal over the period 1983-2000. On the one hand, unemployment rates may stimulate start-up activity of self-employment. On the other hand, higher start-up rates, or higher self-employment, may facilitate industrial re-structuring and renewal, decreasing unemployment in subsequent periods. The overlap between this two effects results in considerable ambiguity about the interrelationship between unemployment and entrepreneurial activity. This paper uses a two-equation vector auto-regression model capable of reconciling these ambiguities and tests it for data from 30 Portuguese regions. The empirical results confirm that the relationship between unemployment and entrepreneurship is ambiguous, regardless of the specific measure used to account for increases in entrepreneurial activity.