Testing the Impact of Unemployment on Self-Employment: Evidence from OECD Countries

The impact of unemployment on self-employment is rather an ambiguous issue in economics. According to refugee effect approach, there are two counter arguments: the theory of income choice argument suggests that increased unemployment may lead to increased self-employment activities whereas the counter argument defends the view that an increase in unemployment rates may decrease the endowments of human capital and entrepreneurial talent causing a rise in unemployment rates further. The empirical evidence on this issue seems to support both hypotheses. This research presents fresh and more comprehensive evidence on this issue from 28 OECD countries using the ARDL approach to co-integration technique over the period 1986-2013. The empirical results indicate that the first hypothesis holds in the case of Belgium, Canada, Sweden and the UK whereas the second hypothesis is valid in the case of Greece, Luxembourg and Portugal. The empirical results for the remaining OECD countries did not reveal any long-run relationship between the variables in question. The empirical results are also evaluated briefly for policy recommendations.