Effects of Unemployment on New Firm Formation: Micro-Level Panel Data Evidence from Finland

This paper aims to provide a comprehensive insight into the role that unemployment plays in influencing new firm formation. Panel data models and micro-level data are used to help achieve this objective. We endeavour to identify simultaneously the separate effects of personal, regional and national unemployment on new firm formation in Finland for the period 1987-1995. The results indicate considerable evidence for a positive and non-linear effect of personal unemployment on the likelihood of an individual to become an entrepreneur. The findings also indicate that the economic situation has an effect on firm formation: times of low unemployment and business prosperity favour entrepreneurship. On the other hand, the analysis gives no clear evidence of the regional unemployment situation affecting the likelihood of founding a business.