Browsing by Author "Ollikainen, Petri"

The aim of this thesis is to understand how labor unions affect the rate of entrepreneurship, either through wage-setting or through unemployment benefits and employment protection legislation (EPL). Entrepreneurship is defined for this thesis as individuals who create jobs and manage them; they have thus an ambition for growth. First of all, a theoretical analysis framework is presented that integrates relevant theories and frameworks of the existing entrepreneurial economic literature. This framework helps to understand the setting where an individual makes his or her occupational choice to become an entrepreneur based on his or her own risk-reward profile. Second, an occupational choice model in a unionized economy is presented which captures the mechanism through which labor unions affect the occupational choice of an individual. Third, it is evaluated whether empirical literature provides any support for the hypotheses proposed by the chosen model. The main findings of this thesis can be summarized as follows. Unions both decrease and increase the rate of entrepreneurship. On the one hand, their tendency to increase wages, the impact of which is increasing in their relative bargaining power and in unemployment benefits they often provide, leads to lower rate of entrepreneurship because the increased wage increases the opportunity cost of entrepreneurship. However, support was found for the view that the rate of membership, the union density, should not be used as a measure of union power but instead union bargaining coverage. Moreover, EPL decreases 'real' opportunity entrepreneurs because they are often least capable of dealing with the hiring and firing costs imposed by EPL, and because EPL restricts the freedom of contracting which is considered to be especially important for smaller entrepreneurial firms. On the other hand, unions may also increase entrepreneurship through so called unemployment effect. Unions’ tendency to increase wages reduces labor demand and the optimal size of enterprises, and thus raises unemployment. This effect is further amplified by higher unemployment benefits. Moreover, unemployment can be considered as a factor that pushes people into self-employment or entrepreneurship due to necessity. However, the effect of unions and labor market regulation decreasing the rate of entrepreneurship seems to dominate the unemployment effect.