Does self-employment reduce unemployment?

This paper investigates the dynamic relationship between self-employment and unem-ployment rates. On the one hand, high unemployment rates may lead to start-up activity of self-employed individuals (the "refugee" effect). On the other hand, higher rates of self-employment may indicate increased entrepreneurial activity reducing unemployment in subsequent periods (the "entrepreneurial" effect). This paper introduces a new two-equation vector autoregression model capable of reconciling these ambiguities and es-timates it for data from 23 OECD countries between 1974 and 2002. The empirical re-sults confirm the existence of two distinct relationships between unemployment and self-employment: the "refugee" and "entrepreneurial" effects. We also find that the "entrepre-neurial" effects are considerably stronger than the "refugee" effects.