Unemployment and New Firm Formation During the Great Recession: The Impact of Prior Levels of Entrepreneurship

Document Type


Publication Date

Winter 2013


This study examines the relationships between levels of new business activity in the states of the U.S. and the high levels of unemployment arising from the Great Recession of 2007-2009. The findings indicate an interaction effect between prior levels of entrepreneurship and the effect of unemployment rates on contemporaneous entrepreneurship rates. Such an interaction effect is implied but not tested in prior research that support both a positive, necessity-based relationship between unemployment and entrepreneurship, and a negative, opportunity-based relationship. The results of this study qualify and quantify the interaction effect, indicating that states with higher levels of entrepreneurship prior to the Great Recession not only had higher levels coming out of it, but also showed levels of subsequent entrepreneurship that were more sensitive to relative rates of unemployment. These effects are also seen when controlling for other contextual variables, including the significant impact of economic freedom on entrepreneurship during the period of high unemployment associated with the recession.

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