NEW RESEARCH | Precarious employment increases chances of starting a business

A small change in the Employment Protection Act encouraged more people to become self-employed. But how did they fare? Researchers at Stockholm University investigate.

When Sweden slightly relaxed the “last in, first out” rule in 2001, the aim of the policy reform was never to promote entrepreneurship. But it still had a clear effect.

– The likelihood of becoming an entrepreneur increased by about 33% for employees affected by the reform, compared to those not affected, says Qinglin Ouyang of Stockholm University.

In his doctoral thesis, he studied the extent to which the reform affected employees’ decisions to leave their permanent jobs and start their own businesses. The reform allowed small firms, with ten or fewer employees, to exempt two people from the rotation rules in the event of dismissal. This increased the risk of job loss for some employees – and it seems to have made more people consider their options.

– Some employees took the opportunity to re-evaluate their position in the labor market and decided that it was the right time to realize a business idea they had already been thinking about.

Did just as well

The research also shows that those who became self-employed after experiencing increased uncertainty did not perform worse than others. On the contrary, their businesses survived for the same length of time, were just as productive and grew at the same rate.

– It challenges the assumption that people driven into entrepreneurship by external shocks are necessarily less prepared or less successful,” says Qinglin Ouyang.

Signal of changing security situation

The researchers were surprised at how big an effect this small change had.

– This reform did not make mass layoffs more likely overnight, but it did send a signal that job security could no longer be taken for granted. And that signal seems to have been enough to influence people’s career choices.

At a time when Sweden still has a low rate of self-employment compared to other OECD countries, the results can provide new insights to both policymakers and organizations that support entrepreneurs (such as incubators and accelerators).

– It is not only the major reforms that change people’s behavior in the labor market. My research shows that it is enough for the feeling of increased insecurity to exist to change individuals’ behavior.

An opportunity in uncertainty

Qinglin Ouyang also believes that the results can give courage to people who are hesitant to start their own business.

– Entrepreneurship can seem daunting – especially compared to the relative stability of employment. But our study shows that people who made that transition during a period of increased uncertainty fared as well as other self-employed workers.

The research is the first to show with causal data that an increased risk of unemployment can directly affect the propensity to start a business.

– If we want to understand why more people don’t start businesses in Sweden, we need to look beyond lack of capital and red tape. Even small labor market reforms play a bigger role than we previously thought,” says Qinglin Ouyang.

Contact qinglin.ouyang@sbs.su.se

More about the thesis
Qinglin Ouyang recently defended his thesis at Stockholm University Essays on Household Risk-Taking.

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