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The Dynamic Relationship between Entrepreneurship, Unemployment, and Growth: Evidence from U.S. Industries

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Research Summary

March 2012             No. 394

The Dynamic Relationship between Entrepreneurship,
Unemployment, and Growth: Evidence from U.S. Industries


By Jose M. Plehn-Dujowich, Plehn Analytical Economic Solutions, LLC,
Willow Grove, PA [30] pages. Under contract number SBAHQ-10-M-0204.


Purpose

Entrepreneurship, economic growth, and unemployment
are interrelated: exactly how is the subject of
this research. Does entrepreneurship lead to economic
growth or vice versa? Does entrepreneurship
lower unemployment, or does unemployment lead to
entrepreneurship? Without the answers to such questions,
policymakers may be attempting to treat the
symptoms of economic problems rather than devising
real solutions for unemployment or slow growth.
Moreover, whereas economic growth and unemployment
are often the focus of academic and media
attention, the importance of entrepreneurship in this
triad is often overlooked. The researcher examined
ten U.S. industry sectors to determine whether there
are “Granger-causal” relationships between entrepreneurship,
economic growth, and unemployment.

Overall Findings

In about half of the industries tested, entrepreneurship
and growth dampened unemployment, while
unemployment spurred entrepreneurship and growth.
The results indicate that entrepreneurship may be
the spark for economic growth. Although the results
are promising, the research shows that the three economic
components are intertwined and that it is not
consistently clear which component ignites or slows
the cycle of entrepreneurship, economic growth, and
employment. In many of the industries studied, the
results were indeterminate and circular. Support for
entrepreneurship can be a key to jumpstarting the
economy, however.

Highlights

• Positive entrepreneurship from the previous
year led to economic growth and decreasing
unemployment in four of the ten industries studied.
(Results were indeterminate in the remaining
six sectors.) Clearly, one would expect that
an increase in the number of businesses would
lead to increased sales and hiring.

• But past growth also led to increases in entrepreneurship
in four of the ten industries and
decreased unemployment in six of the ten
industries.

• And unemployment led to increases in entrepreneurship
in three of the ten industries. This
may suggest that increases in the number of
unemployed led to lower wages, which in turn
led to increases in the quantity of labor sought
by employers.

• Surprisingly, unemployment also led to growth
in four of the ten industries. This result may
reflect a business cycle effect in which economic
growth tends to be strong just after a downturn
following a period of high unemployment.

• Construction is most sensitive to the business
cycle and was the leading indication of a slowdown
in the most recent downturn. Construction
exhibited declining employment in 2005,
well before the National Bureau of Economic
Research pegged the start of the recession at
December 2007.

Scope and Methodology

The study estimates three equations, for entrepreneurship,
growth, and unemployment, where the
variables (lagged by one year) of the other two are
used as dependent variables. This method is used to
see what variable causes the cycle and which moves
in reaction to the other variables.

The equations are run for ten major industries.
The method is referred to as a Granger causality
test, where a system of equations is used to show
causation, rather than merely correlations. Data used
for the report consisted of establishment entry and
exit data from the Business Employment Dynamics
database of the Bureau of Labor Statistics (BLS)
to measure entrepreneurship, Census/BLS Current
Population Survey data to create major industry-level
unemployment rates, and value-added data by industry
from the Bureau of Economic Analysis to track
economic growth. The time period studied was 2000-
2009, quarterly.

This report was peer-reviewed consistent with
Advocacy’s data quality guidelines. More information
on this process can be obtained by contacting
the director of economic research by email at
advocacy@sba.gov or by phone at (202) 205-6533.

Ordering Information

Research from the Office of Advocacy is online at
www.sba.gov/advocacy/847. Copies are available
for purchase from:

National Technical Information Service
5285 Port Royal Road
Springfield, VA 22161
(800) 553-6847 or (703) 605-6000
TDD: (703) 487-4639
www.ntis.gov
Order number: PB2012-107568
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Microfiche A03 ($27.00)
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Download A00 ($15.00)

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This report was developed under a contract with the
U.S. Small Business Administration, Office of Advocacy,
and contains information and analysis that were reviewed and
edited by officials of the Office of Advocacy. However, the final
conclusions of the report do not necessarily reflect the views
of the Office of Advocacy.

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