Department of Economics, UCSC

The “Great Recession” resulted in many business closings and foreclosures, but what effect did ithave on business formation? On the one hand, recessions decrease potential business income andwealth, but on the other hand they restrict opportunities in the wage/salary sector leaving the neteffect on entrepreneurship ambiguous. The most up-to-date microdata available -- the 1996 to2009 Current Population Survey (CPS) -- are used to conduct a detailed analysis of thedeterminants of entrepreneurship at the individual level to shed light on this question. Regressionestimates indicate that local labor market conditions are a major determinant of entrepreneurship.Higher local unemployment rates are found to increase the probability that individuals startbusinesses. Home ownership and local home values for home owners are also found to havepositive effects on business creation, but these effects are noticeably smaller. Additionalregression estimates indicate that individuals who are initially not employed respond more to highlocal unemployment rates by starting businesses than wage/salary workers. The results point to aconsistent picture – the positive influences of slack labor markets outweigh the negativeinfluences resulting in higher levels of business creation. Using the regression estimates for thelocal unemployment rate effects, I find that the predicted trend in entrepreneurship rates tracksthe actual upward trend in entrepreneurship extremely well in the Great Recession.