Opportunity and Necessity Entrepreneurship: Local Unemployment and the Small Firm Effect

TLDR: In this article, the effects of local unemployment rates on the propensity of low-ability and high-ability workers to transition into self-employment were tested using two samples from the PSID.

Abstract: Low-ability entrants to self-employment are “necessity entrepreneurs” forced into self-employment by adverse circumstances, while high-ability entrants are opportunity entrepreneurs attracted by a promising idea. Effects of local unemployment rates on the propensity of low-ability and high-ability workers to transition into self-employment are tested using two samples from the PSID. The results show a positive correlation between local unemployment rates and entry into self-employment for low-ability workers, but not for high-ability workers. Including firm-size to eliminate possible distortions in the results indicates that the positive association between unemployment and self-employment among low-ability workers is in fact driven by the effect of employer size. Moreover, a negative association between unemployment and self-employment among high-ability workers is observed.