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From employee to entrepreneur: The role of unemployment risk

Author

Listed:
  • Hou, Ai Jun
  • Jonsson, Sara
  • Li, Xiaoyang
  • Ouyang, Qinglin

Abstract

We use Swedish administrative data to study the role of unemployment risk in salaried employees’ decisions to become entrepreneurs. Using the 2001 relaxation of Sweden’s last-in-first-out (LIFO) dismissal rule as an exogenous shock to unemployment risk, we find that employees facing increased unemployment risk are more likely to become entrepreneurs. The effect is more pronounced for employees with longer tenure, as they were newly exposed to greater unemployment risk. When we track entrepreneurs’ income dynamics and the performance of their ventures, we find that entrepreneurs who used to face greater unemployment risk do not underperform compared to other entrepreneurs. Our results provide some of the first empirical evidence of how employees respond to increased unemployment risk.

Suggested Citation

  • Hou, Ai Jun & Jonsson, Sara & Li, Xiaoyang & Ouyang, Qinglin, 2025. "From employee to entrepreneur: The role of unemployment risk," Journal of Financial Economics, Elsevier, vol. 163(C).
    • Handle: RePEc:eee:jfinec:v:163:y:2025:i:c:s0304405x24001892
    DOI: 10.1016/j.jfineco.2024.103966
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    More about this item

    Keywords

    Entrepreneurship; Unemployment risk; Employment protection law; Entrepreneurial performance;
    All these keywords.

    JEL classification:

    • D16 - Microeconomics - - Household Behavior - - - Collaborative Consumption
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • G50 - Financial Economics - - Household Finance - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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