Entrepreneurship and Unemployment

Department of business administration, Beirut Arab University, Lebanon.

Shames el dine Kebbe

Abstract:
A great deal of ambiguity exists in the literature over the relationship between
entrepreneurship and unemployment. These two variables face two different
theories; Schumpeter theory (Impact of entrepreneurship on unemployment),
and the refugee theory (Impact of unemployment on entrepreneurship). In this
research paper we’ll be using 2 methods which are: questioner and survey.
Furthermore, this study aims to study the relation between these two variables
and their effect on our Lebanese economic growth.

Introduction:
It was believed that small businesses are less efficient economic wise than
larger businesses. However, since the last decades of the twentieth century this
point of view took the opposite direction. Recently, entrepreneurship has come to
be a subject, especially by economists. It has become the heart of growth and as
the single most indispensable player in a modern economy (ACS and Audretsch,
2005). Numerous benefits are associated in the society through entrepreneurship.
It drives innovation, solves unemployment and satisfies new consumer demands.
In Lebanon nowadays, a large number of youth and graduates are looking for
opening new small businesses or seeking for new opportunities due the crisis the
country is undergoing. Hence, entrepreneurship was the alternative option for
youth to reduce unemployment, since private or public sector in Lebanon were
never a choice to depend on.
Rates of unemployment in Lebanon in 2018-19, the youth unemployment rate
was 21.4% for women and 24.5% for men, this percentage increased after the
crisis to reach 47.8% in January 2022 (2022 - Central Administration of Statistics
CAS).
Lots of debates were discussed about the relationship between the
entrepreneurship and unemployment. So far it’s been confined between two
effects (the Refugee and Schumpeter). The first is theoretical stance stems from
the effort to deflate unemployment phenomena among people through
entrepreneurship activity (Oxenfeldt, 1943). According to this view, the increase
in unemployment encourages entrepreneurship (Blau, 1987, Evans and Leighton,
1990, Evans and Jovanovich, 1989, Blanchflower and Meyer, 1994). While the
second effect suggests that unemployment will decrease as entrepreneurship
increases (Garofoli, 1994; Audretsch and Fritsch, 1994; Audretsch, et al. 2001). In
addition, they found in their research that unemployment is adversely related to
new-firm startups, that is, as new businesses are established employability is
stimulated and unemployment reduces substantially.

Entrepreneurship:
Entrepreneurship is now one of the most common alternative solution used to
increase the economic growth. As mentioned by (Carton, Hofer and Meeks 1998),
there are two distinctly different approaches in defining entrepreneurship. The
first is to define what entrepreneurs are and then observe them. The second is to
propose a prior definition of entrepreneurship and its related behaviors, and
thereby define entrepreneurs as those who engage in entrepreneurial activity.
The modern understanding of entrepreneurship owes much to Schumpeter
(1934), who describes entrepreneur as “a person who destroys the existing
economic order by introducing new products and services, by introducing new
method of production, by creating new forms of organizations, or by exploiting
new row materials” (Bygrave and Zacharakis, 2011, p.1). To Joseph Schumpeter,
entrepreneurship occurs when there is innovation in the introduction of a new
product, organization or process. Hence, his understanding of an entrepreneur
was a conceptual abstraction characterized by the creation of new combinations”
(Salgado-Banda, 2005). Additionally, he makes the distinction between five
different manifestations of entrepreneurship; a new good, a new method of
production, a new market, a new source of supply of intermediate goods, and a
new organization (Karlsson, Friis and Paulsson, 2004). In 1999, Wennekers and
Thurik present a wide picture of entrepreneurship, noting that it is “the manifest
ability and willingness of individuals, on their own, within and outside existing
organizations to perceive and create new economic opportunities (new product,
new production methods, new organizational schemes and new-market
combinations), and to introduce their ideas in the market, in the face of
uncertainty and other obstacles, by making decisions on location, from and the
use of resources and institutions” (Carree and Thurik, 2005). However, ACS and
Audretsch definition embraces “all businesses that are new and dynamic,
regardless of size or line of business, will exclude businesses that are neither new
nor dynamic as well as all nonbusiness organizations” (2005).

Unemployment:
Unemployment is one of the main indicator of economic activity. Unemployment
display a number of costs for nation, such as economic, social and physiological. It
is defined as the number of economically active population who are without work
but available for and seeking work, including people who have lost their jobs and
those who have voluntarily left work by the International Labor Organization (ILO)
(World Bank, 1998). Unemployment rate is generally measured by using
unemployment rate which is the percentage of labor force that is employed.
Unemployment is the wide spreading conflict that affects societies around the
World, and which is the government responsibility to regulate and observe (i.e.
Lebanese government). Higher unemployment causes high level of poverty,
higher opportunity cost and several development challenges (Oladele, Akeke and
Oladujoye, 2011). And according to our case, it pushed people to rob markets,
companies, even each other’s. Nevertheless to highly increase in riots, and
definitely lead to neither security nor stability. Economists often consider
unemployment as a necessary step for finding a job in a labor market. Individuals
differ by the level of education, intelligence, experience, creativity and etc.
Another factor is the variety of jobs, the requirements to perform, job condition,
location, opportunity to advance in career and other characteristics. Lebanon is
encountering high rates of unemployment due the crisis he is undergoing from
October 17th till now. The unemployment rate stood at 29.6% in January 2022
(Central Administration of Statistics (CAS), 30 June 2022).
Relation between Entrepreneurship and Unemployment:
Unemployment is definitely related one way or another to entrepreneurship
either direct or in indirect way. The relation between unemployment and
entrepreneurship is full of ambiguity. Researchers believe that those 2 variables
are attached through push effect (Refugee effect) and pull effect (Schumpeter’s
effect). According to refugee effect the unemployment encourages
entrepreneurship (Blau, 1987; Evans and Leighton, 1990; Evans and Jovanovich,
1989; and Blanchflower and Meyer, 1994). While Schumpeter’s effect assumes
that new entrepreneurship and new start-ups will provide employment
opportunities and indirectly will lead to the creation of employment in labor
market (Van stel, Thurik, Verhuel, baljue 2007). Furthermore, researchers see that
new businesses will always possess a high possibility of new jobs and
employments (Audretsch, Carree, and Thurik 2001). However; in contradictory,
the unemployed people tend to possess fewer backups of human and social
capital and entrepreneurial skills required to launch and sustain a new firm which
may lead to early exit (Thurik, 2007; Lucas, 1978; Jovanovich, 1982; Baptista &
Van Stel & Thurik,2006) .High unemployment may also imply lower levels of
personal wealth reducing the likelihood of becoming self-employed or the survival
in the initial stages of business ownership (Hurst & Lusardi, 2004; Van Stel &
Thurik & Verheul & Baljeu, 2007). In addition, high level of unemployment may
correlate with low economic growth leading to a low number of entrepreneurial
opportunities (Audretsch & Thurik & Verheul & Wennekers, 2002; Baptista & Van
Stel & Thurik, 2006). A low rate of entrepreneurship may also be a consequence
of the low economic growth levels, which also reflect higher levels of
unemployment (Audretsch, 1995; Audretsch & Carree & Thurik, 2001). On the
other hand, some studies find that greater unemployment serves as a catalyst for
startup activity (Reynolds & Miller & Makai, 1995; Reynolds & Storey &
Westhead, 1994; Hamilton, 1989; Highfield & Smiley, 1987; Yamawaki, 1990;
Evans & Leighton, 1989 & 1990), but many studies have found that
unemployment reduces the amount of entrepreneurial activity (Audretsch &
Fritsch, 1994; Audretsch, 1995; Audretsch & Carree & Thurik, 2001). If a country
faces high unemployment rate, entrepreneurs face reduced demand of products
or services. This reduces the revenue accruing from entrepreneurship, and capital
availability, which leads to increasing the risk of bankruptcy. According to (Lucas,
1978; Javanovic, 1982) who observe that there is an inverse relationship between
entrepreneurship and unemployment (high level of unemployment is associated
with a low level of entrepreneurship), i.e. unemployed people do not have the
main factors to launch and do not have the abilities of the entrepreneur.

Statement of the Problem:

Lots of youth people in our society today can’t find work easily, which is because
of lack of employment opportunities and increase in population. The situation
became worse after Corona virus and 2019 revolution. Job creation through
creativity, entrepreneurship education, opportunity recognition, infrastructural
development will revive the economic prospect to reduce the rate of
unemployment and will boost the living standard of the youths and crime rates
will reduce drastically to a very low level. Unemployment has become a global
phenomenon of the 21st century all over the world with the highest rate recorded
in the developing nations. The crisis is getting more complicated in Lebanon every
year as a result of the lira rates and black market and high number of youth
graduates who pass out from various tertiary institutions into the labor market to
join the already existing numbers of unemployed youths. No doubt, the Lebanese
market is now over crowded with increase in unemployed youths. Some of the
desperate youths in a bid to get something tangible to do now migrate to Europe
through Mediterranean Sea which involves a lot of risk and tragedy to their life
causing death and slavery for those who manage to survive as we saw lately
(akkar 2022).
Literature review:
Literature highly describes the existing interrelationship between
entrepreneurship and unemployment. Yet, review of literature drives us to
considerable ambiguities, confusion and disagreement among researchers. In
fact, there is a dissection in the literature between researchers that have studied
the impacts entrepreneurship has on unemployment and those who have
intended to study the impacts on entrepreneurship caused by a higher
unemployment.

(Audretsch and Fritsch, 1994) had a study on launching new firms in West
Germany. Their study found that the rate of newly established firms is negatively
related to the rate of unemployment. Thus the more start-ups that are
established the lower is the unemployment rate. Findings shows that start-ups %
in 1980s are not related to employment change, while is 1990s, those regions
with higher start-up rate experience higher employment growth (2002 cited
Baptist, Escària, Madruga, 2008). By other means, they found negative
relationship between unemployment and start-ups.

(Van Stel, Thurik, Verheul and Baljeu, 2006 ) Using a newly developed model
and an OECD wide data set found that argue that in addition to unemployment
influencing start-up activity, it has also been claimed that entrepreneurship
influences unemployment. In their study, they focus upon evaluating this
direction of causality in Japan. They concluded that, although Japan’s
unemployment rate has been influenced by different exogenous shocks as
compared with other countries, the effects of entrepreneurship on
unemployment are not distinct.

(Marič et al (2010) reached to entrepreneurship as a solution to the

unemployment conflict. Their research was built on the hypothesis that where
there is a higher rate of unemployment, more people will transit into
entrepreneurship and where there is a higher rate of entrepreneurship there will
be a lower level of unemployment. Based on the data of their study, the statistical
significance neither confirm nor refuse the two previous hypotheses (Babangida
Muhammad Musa, D.M. Semasinghe 2013) concluded that entrepreneurship has
a critical relation with unemployment. This is shown in the results of their study.
Some countries with high rate of entrepreneurship activity have low rate of
unemployment (e.g. developed countries like USA, Japan, and UK). While in the
other hand countries with high rate of unemployment have low rate of
entrepreneurial activities (e.g. developing nations like Namibia, Nepal, and
Kenya). The interaction between entrepreneurship and unemployment is
determined by the country’s position of the labor market. An examination of the
relationship between entrepreneurship and unemployment show that both in
theory and practice, there is a "pull" (business reduces unemployment) effects,
while they opposes the "push" (unemployment encourages to take business)
effect notion.

(S. Ghavidel, G. Farjadi, and A. MohammadPour, 2011) in their research

they studied the relationship between unemployment and entrepreneurship rate
in 7 developing and 23 OCED countries during the interval 1995-2007. They used
the method of simultaneous equations as a panel of data for developing and
developed countries but in a separate way. Their studies resulted that
Schumpeter effect is precise but refugee effect is still not clear. Besides, this
article showed that the relation between unemployment rate and
entrepreneurship rate is at first positive followed by negative. So they deduced
it’s a negative relationship.

(Begoña Cueto, Matías Mayor, Patricia Suárez, 2012) Results showed a

negative direct effect while the indirect effect is positive. So an increase in
unemployment causes a decrease in self-employment whereas, unemployment
growth leads to increase self- employment. Their interpretation of their results is
that if unemployment increases, self-employment decreases. However, if the
growth in unemployment is general, incentives for entering self-employment can
raise meaning that there would be a “refugee”.

(Babangida Muhammad Musa, and D.M. Semasinghe 2013) concluded

that entrepreneurship has a significant link with unemployment. Some countries
with high rate of entrepreneurial activity have low rate of unemployment (e.g.
developed countries like USA, Japan, and UK). While in the other hand countries
with high rate of unemployment have low rate of entrepreneurial activities (e.g.
developing nations like Namibia, Nepal, and Kenya). The interaction between
entrepreneurship and unemployment is essentially determined by the country’s
position of the labor market. An examination of the communal relationship
between entrepreneurship and unemployment show that both in theory and
practice, there is a "pull" (business reduces unemployment) effects, however they
opposed the "push" (unemployment encourages to take business) effect notion.
They suggest the development of entrepreneurial skill and potentials and acting
based on the promotion of entrepreneurial thought.

(Azer Dilanchiev, 2014) the relationship between unemployment and

entrepreneurship rate in Georgia between 2000 and 2013 years was analyzed. He
found out the importance of entrepreneurship development solution for
unemployment problem and could not confirm the hypothesis that
unemployment encourages the creation of employment. However,
entrepreneurship is a main factor and for countries in transition like Georgia, the
development of entrepreneurship and entrepreneurial skills is very essential, it
can help to solve the unemployment problem. The paper suggests the importance
of having entrepreneurial skills and takes necessary actions based on promoting
of entrepreneurial ideas. The results shows that we can confirm that change in
entrepreneurship has a positive effect on job creation by reducing unemployment
level, which indicates that development of entrepreneurship is one of the key
factor(s) in solving unemployment problem in Georgia, he concluded that his
analysis is significant concerning of regression analysis where independent
variable is an average Entrepreneurship rate and it confirms the hypothesis.
However, the results of regression analysis for the other hypothesis are not
scientifically significant so that, based on the data collection and years chosen
from 2000 to 2013.The second results rejects the push hypothesis which means
that in case of Georgia the Higher rate of unemployment, does not encourage
people to start entrepreneurial activity.

(Şükrü APAYDIN1, 2018) In his research, two separate models were

established within the framework of the ARDL method using the quarterly data
from Turkey's 2000-2016 periods. The unemployment rate in the first model and
the entrepreneurship rate in the second model were taken as dependent
variables. As a result of his estimations, a negative relationship was found
between entrepreneurship and unemployment. In other words, it was concluded
that the Schumpeter effect was valid. In contrary, it is not possible to talk about
the effect of refugee. From this point of view, findings support the idea that the
unemployed persons will not tend to entrepreneurship because they do not have
sufficient capital, knowledge and equipment.

Methodology:
The paper tests two hypothesis according to what is mentioned above:
H1: Higher rate of entrepreneurship decreases unemployment rate.
H2: Higher the rate of unemployment, leads to more entrepreneurial
activity.
Due to the chaos happening in the country and due to several obstacles
that could face us while collecting data from public sectors, it’s
preferable to follow the questioner and the survey method in our work.
This lead us to the idea of collecting a samples of observations from
public about our topic. Questions will be concerned as such: Is the
entrepreneurship the answer of unemployment? Do you think
entrepreneurship would be an alternative solution for our economic
growth? Will unemployment be reduced by launching new activities?
Are entrepreneurship and unemployment related negatively or
positively? In addition, surveys must be done about the % of
unemployed people in public and the % of youth and graduate people
who’ve launched new activities.

Absolutely we could face some limitations during conducting our

research:
Possible Methodological Limitations:
Sample size -- the number of the units of analysis you use in your study
is dictated by the type of research problem you are investigating. Note
that, if your sample size is too small, it will be difficult to find significant
relationships from the data, as statistical tests normally require a larger
sample size.
Lack of available and/or reliable data -- a lack of data or of reliable data
will likely require you to limit the scope of your analysis, the size of your
sample, or it can be a significant obstacle in finding a trend and a
meaningful relationship.
Access -- if your study depends on having access to people,
organizations, or documents and, for whatever reason, access is denied
or otherwise limited, the reasons for this need to be described.
Summing up:
We deduce that entrepreneurship has a significant relation with unemployment.
This is clearly shown in the outcomes of this study. Some countries with high rate
of entrepreneurial activity have low rate of unemployment (e.g. developed
countries like USA, Japan, and UK). While in the other hand countries with high
rate of unemployment have low rate of entrepreneurial activities (e.g. developing
nations like Lebanon, Nepal, and Kenya). The interaction between
entrepreneurship and unemployment is essentially determined by the country’s
position of the labor market. An examination of the relationship between
entrepreneurship and unemployment show that in theory, there is a "pull"
(business reduces unemployment) effects, while I opposed the "push"
(unemployment encourages to take business) effect. I suggest the development of
entrepreneurial skill and potentials based on the promotion of entrepreneurial
ideas. But nevertheless, this research is not accurate nor précised due to the lack
of numerical statistics which are essential in such study due many obstacles (riots,
instability, and difficult reach to the statistical ratios from public sectors). Hence
another research is recommended to resolve the relation between
entrepreneurship and unemployment.

References:
ACS, Z. and Audretsch, D. (2005), “Introduction to the handbook of
entrepreneurship research”, In: ACS, Z. and Audretsch, D. (Eds.) Handbook of
Entrepreneurship Research, Springer, pp. 3-8.
Blau, D.M. (1987) A TIME SERIES ANALYSIS OF SELF EMPLOYMENT IN THE UNITED
STATES. JOURNAL OF POLITICAL ECONOMY, 95(3) 445-467
Evans, D. S., & Leighton, L. (1990). Small Business Formation by Unemployed and
Employed Workers. Small Business Economics, 2(4), 319-330.
Evans, D. S., & Jovanovich, B. (1989). Estimates of a Model of Entrepreneurial
Choice under Liquidity Constraints. Journal of Political Economy, 97(3), 657-674.
Blanchflower, D., & Meyer, B. (1994).A Longitudinal Analysis of Young
Entrepreneurs in Australia and the United States. Small Business Economics, 6(1),
1-20.
Garofoloi, G. (1994).New Firm Formation and Regional Development: The Italian
Case. Regional Studies, 28(4), 381-394.
Audretsch, D. B., & Fritsch, M. (1994). The Geography of Firm Births in Germany.
Regional Studies, 28(4), July, 359-365.
Carton, R., Hofer, C. and M. Meeks (1998), “The entrepreneur and
entrepreneurship: operational definitions of their role in society”, Annual
International Council for Small Business Conference, Singapore. Retrieved
December 2, 2011.
Schumpeter, J.A. (1934). The Theory of Economic Development. Cambridge:
Harvard University Press.
Bygrave, W. and Zacharakis, A. (2011), Entrepreneurship, 2nd ed. John Willy &
Sons, Inc.
Karlsson, C., Friis, C. and Paulsson, T. (2004) Relating Entrepreneurship to
Economic Growth. CESIS Electronic Working Paper Series, 13 September.
Carree, M. and Thurik, A. (2005), “The importance of entrepreneurship on
economic growth”, In: ACS, Z. and Audretsch, D. (Eds.) Handbook of
Entrepreneurship Research, Springer, pp. 437-472.
Thurik,R., Verheul, I., Baljeu, L.,Van Stel, A.J.(2007). The Relationship between
Entrepreneurship and Unemployment in Japan. Tinbergen Institute discussion
paper TI-080/3. Erasmus University Rotterdam, university van Amsterdam, and
vrije university Amsterdam.
Audretsch, D.B., Carree, M.A., & Thurik,A.R.(2001). Does entrepreneurship reduce
unemployment? Tinbergen Institute discussion paper T IOL-074/30.Erasmus
University Rotterdam.
Van Stel, A., Thurik, R., Verheul, I. And L. Baljeu (2006), “The contribution of
business ownership in bringing down unemployment in Japan”, Discussion Paper
on Entrepreneurship, Growth and Policy 2006-05, Max Planck Institute of
Economics.
Hurst, E., lusardi, A. (2004).Liquidity Constraints, Household Wealth and
Entrepreneurship. Journal of Political Economy, 112(2), 319-347.
Lucas, R. E. (1978). On the Size Distribution of Business Firms. Bell Journal of
Economics, 9, 508 -523.
Jovanovic, B. (1982). Selection and the evolution of industry. Econometrica, 50,
649-670.