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ABSTRACT

Linking unemployment to self-employment dates to at least Oxenfeldt (1943), who argues that individuals confronted with unemployment and low prospects for wage-employment will turn to self-employment as a viable alternative. This is an extension of Knight’s (1921) view that individuals decide between three states – unemployment, self-employment and employment. Al-though the actual decision is shaped by the relative prices of these three activities, implied is the prediction of a positive correlation between self-employment and unemployment. This simple theory of income choice has been the basis for a range of studies focusing on the decision of individuals to become self-employed (Parker, 2004; Grilo and Thurik, 2005; Grilo and Irigoyen, 2006). Specifically, this theory suggests that increasing unemployment leads to increasing start-up activity because the opportunity cost of starting a firm has decreased (Blau, 1987; Evans and Jovanovic, 1989; Evans and Leighton, 1990; Blanchflower and Meyer, 1994). This effect has been referred to as the unemployment push, refugee or desperation effect. There is, however, an important counterargument to this theory: The unemployed tend to possess lower endowments of the human capital and entrepreneurial talent needed to start and sustain a new firm. This, in turn, would suggest that high unemployment may be associated with a low degree of self-employment. High unemployment rates may also imply lower levels of personal wealth which also reduce the likelihood of becoming self-employed (Johansson, 2000; Hurst and Lusardi, 2004). Lastly, high unemployment rates may correlate with stagnant economic growth leading to fewwer entrepre-neurial opportunities (Audretsch, 1995; Audretsch, Thurik, Verheul and Wennekers, 2002).

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