The effect of local business climate on employment
| DOI | https://doi.org/10.1108/JEPP-05-2014-0020 |
| Pages | 2-24 |
| Published date | 11 April 2016 |
| Date | 11 April 2016 |
| Author | Stefan Fölster,Li Jansson,Anton Nyrenström Gidehag |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
The effect of local business
climate on employment
Stefan Fölster
Royal Institute of Technology, Stockholm, Sweden and Reform Institute,
Stockholm, Sweden
Li Jansson
Almega, Stockholm, Sweden, and
Anton Nyrenström Gidehag
Economics Department, Örebro University, Örebro, Sweden
Abstract
Purpose –The purpose of this paper is to analyse empirically whether policies to improve the local
business climate affect employment in general, and among groups of immigrants that suffer from
structural unemployment.
Design/methodology/approach –The paper analyses the relation between Swedish entrepreneurs’
perception of the local business climate and total employment as well as employment among
immigrants born outside of Europe, a group that tends to be particularly affected by structural
unemployment. Instrumental variable and Arellano-Bond GMM estimation indicate that a better local
business climate improves immigrants employment considerably more than total employment.
Findings –The results suggest that improvements in institutions and policies that entrepreneurs
perceive as shaping the business climate may have an important effect on employment, in particular
employment of groups that tend to have high rates of structural unemployment. Given the limitations,
the estimates appear robust over a variety of specifications.
Research limitations/implications –The authors use a subjective measure of local business
climate policies, but instrument this with an exogenous variable and lagged variables. The unit of
observation are Swedish municipalities, which in contrast to other countries control many factors
important for business.
Practical implications –Employment policies often focus on labour market institutions. The results
suggest that other policies and their local implementation may be equally important for employment.
Unfortunately the study does not reveal much detail of which specific measures give the greatest
effects. That remains to be done in future research.
Social implications –The positive employment effects the authors find are particularly large for
immigrants born outside of Europe. If the results are correct, then better local business climate could
make an important contribution to social cohesion.
Originality/value –While there are more studies that analyse the relation between entrepreneurship
and employment, much fewer previous studies have tried to establish a link between business climate
policies and employment. The authors do this with a novel approach.
Keywords Employment, Ethnic groups, Local policy, Local government
Paper type Research paper
1. Business climate and structural unemployment
In macroeconomic analyses improvements in the business climate are often interpreted
as general increases in demand that push up wages and force a country ’s central bank
to raise interest rates, which dampens economic growth and restores the labour market
to a state of equilibrium. This view therefore assumes that employment over the
business cycle is not affected by improvements in the business climate.
Yet policy discussion regularly assumes that a better business climate improves
employment rates. Empirical support for such a link has been fragmented, and mostly
Journal of Entrepreneurship and
Public Policy
Vol. 5 No. 1, 2016
pp. 2-24
©Emerald Group Publishing Limited
2045-2101
DOI 10.1108/JEPP-05-2014-0020
Received 3 May 2014
Revised 5 October 2014
Accepted 9 January 2015
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
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JEPP
5,1
only indirect. A number of studies have in recent years correlated measures of business
climate with employment or employment growth. Some of these studies use an index at
the country level, such as the World Bank “Ease of Doing Business”index and relate
these measures to employment[1].
Another strand of the research literature examines the predictive power of regional
or local business climate measures. VanMetre and Hall (2011), for example, find little
evidence of a link between business climate indices and entrepreneurial activity[2].
Kolko et al. (2013) compare nine different indices of business climate for American
states. They find that indices that focus on wider issues such as quality of life or
knowledge jobs tend to be poor predictors of employment growth, while indices that
focus on the cost of doing business due to regulation and taxes tend to be better
predictors. Fölster and Peltzman (2010) find a relation between a Swedish local
business climate index and subsequent income and employment growth. Generally
these studies identify correlations rather than causal links.
This paper starts out describing a number of mechanisms through which local
business climate could affect structural unemployment, and therefore also employme nt
levels over the business cycle. Then it proceeds to an empirical test that pays attention
to causality as well as a number of other econometric issues.
A complication to which we will return is that the business climate is not an
exogenous factor. Rather it is generated endogenously as a result of the attitudes
embraced by voters, politicians, officials and entrepreneurs and can in turn be
influenced by the industrial structure or other factors that are linked to the employment
rate[3]. The business climate is thus a consequence of institutions and actions that arise
endogenously. Acemoglu et al. (2005) provide an overview of the research literature on
the emergence of endogenous institutions and growth. Our empirical approach to test
for causality draws on this literature.
By improvements in the business climate we mean measures that facilitate and
increase the profitability of starting, running and investing in a business. Examples are
measures that reduce the costs and risks associated with running a business and
complying with regulations such as lead times for building permits, barriers to entry
and unfair competition, how well schooling meets the needs of local emplo yers, as well
as lower and simpler handling of taxes and charges to facilitate new enterprise. Even
institutions and regulations that affect access to financing may be important to
business climate[4]. Some of these issues are directly under control of local authorities.
Even national regulation is often administered by local representation that can be more
or less competent and growth-oriented.
Our point of departure is that a better business climate, ceteris pa ribus, induces
more people to invest in new enterprises and more existing companies to invest in
expansion or new business areas. More new businesses are created and investments in
existing companies’new ventures are higher in any given year, thereby, naturally,
displacing other companies. In many economic models various dimensions of a better
business climate lead to a faster turnover of companies, higher productivity growth
and higher real wages. This literature is reviewed well in Carree and Thurik (2010) and
Nyström (2008b). Several studies also suggest that various aspects of the business
climate also influence the emergence of fast growing “gazelle”firms or
entrepreneurship[5] [6].
For several reasons a better business climate could also have a greater effect on
those groups that have, or are perceived as having, productivity below the minimum
wage and that therefore are more susceptible to structural unemployment.
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Effect of local
business
climate
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