UNEMPLOYMENT AND NEW FIRM FORMATION DURING THE GREAT RECESSION: THE IMPACT OF PRIOR LEVELS OF ENTREPRENEURSHIP

Jeffrey S. Sugheir
C. Christopher Baughn
Kent E. Neupert
Boise State University
ABSTRACT
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.