Unemployment and Firm Entry and Exit: An Update on a Controversial Relationship

Abstract

The present study explores the relationship between unemployment and subsequent firm entry and exit for all 103 Italian provinces for the period 1997 to 2003. We estimate two models. In the first model we do not take cross-border effects into account and concentrate only on individuals, unemployed or employed, starting or closing a business in the province they live in. In the second model we incorporate cross-border effects by taking into account unemployed and employed persons from adjacent provinces. Findings indicate a positive effect of unemployment on net entry. Interestingly this effect is not due to a positive ‘push’ effect on entry but rather a negative effect of unemployment on firm exit. This may signal a lack of dynamics in the Italian labor market.