Abstract
This study examines the effect of unemployment on the entry of small self-employed businesses (SSBs) in Korea’s service industries and assesses whether the excess entry of SSBs has resulted in their excess exit. Twelve service industries that are frequently regarded as being SSB intensive in Korea are chosen. The Hausman–Taylor model is applied to Korean regional panel data for the period 2006–2014. The empirical results indicate that the relationship between unemployment and SSB formation varies across the sample industries. In particular, the unemployment-push (pull) hypothesis is confirmed in three (six) industries. Additionally, the results show that an increase in the number of existing businesses in the previous year, partly as a result of increased entries, has increased the number of closed SSBs. On the basis of these results, this study assesses the Korean government’s SSB policies and suggests several policy recommendations.
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Notes
Previous studies have also confirmed that the role of unemployment in new business formation varies across individuals, industries, and levels of aggregation. For example, Ritsilä and Tervo (2002) show a positive effect of personal unemployment on the likelihood of an individual entering into self-employment but no clear evidence of regional unemployment affecting the likelihood of founding a business. Tervo (2006) shows that a high level of unemployment in a region pushes individuals from self-employed families into self-employment but has the opposite effect on individuals from wage-earner families. Wang (2006) indicates that the phenomena described by the unemployment-push and demand-pull hypotheses exist simultaneously in Taiwan. Carree et al. (2008) show that the effects of unemployment on entry and exit depend on the sector being studied, but that they are mainly negative.
This definition of a “small” business differs from those in other studies or countries. For example, Hurst (2011) refers to small business as businesses with between 1 and 20 employees, although he considers alternative definitions based on higher employment size cutoffs. Because this study focuses on the start-up of self-employment, a lower employment size cutoff may be preferable.
The OECD (2018) reports that the ratio of employment by the service sector to total employment for Korea and the OECD was 69.7 and 73.1%, respectively, as of 2015. This value for Korea is slightly different from that in Table 1, partly because of the source of data. It appears that whereas OECD statistics are collected from the Economically Active Population Survey in Korea, the source of Table 1 is the Census on Establishments.
This econometric specification is the same as that in Kim et al. (2017), with minor modifications. Previous studies have frequently used the entry and exit rate as a dependent variable. As explained later, this study regards the number of existing businesses as a measure of competition between businesses. Therefore, the number of established and closed SSBs per population is used as a dependent variable instead of the entry and exit rate. Since the number of established and closed SSBs is measured per population, the population amount is not included as an independent variable.
In Korea, data on the unemployment rates of the boroughs were unavailable. To avoid a sample selection bias, we assume that the unemployment rate of a borough in a metropolitan city (e.g., Dongdaemun-gu in Seoul metropolitan city) is the same as that of the whole metropolitan city (e.g., Seoul metropolitan city).
The reverse causality problem happens when start-up businesses hire employees, leading to subsequent decreases in unemployment. In particular, previous studies on the relationship between the level of new business formation and employment change or economic growth usually assume reverse causality (Fölster 2000; Acs and Armington 2004; Fritsch and Mueller 2004; Thurik et al. 2008). Applying a vector autoregressive model to data from 23 OECD countries for the period 1974–2002, Thurik et al. (2008) find that changes in self-employment rates have a negative impact on subsequent unemployment. However, changes in unemployment have a positive impact on subsequent changes in self-employment rates. In contrast, Fritsch and Mueller (2004) indicate that new firms can have both a positive and a negative effect on regional employment.
Summarizing several previous studies, Acs and Storey (2004) suggest that urban areas where average firm size is small and which have experienced growth in population seem more likely to have high rates of new firm formation. Whereas previous studies usually used data on all private sector, however, this study focuses on SSBs in service sector. Therefore, in this study, it may be difficult to predict the effect of urban areas and population growth on the basis of the previous studies.
For example, when a new business model is created, more new businesses tend to form, despite the presence of many old businesses. In fact, whereas a conventional singing room usually charges an hourly fee, a new type of a singing room that charges a fee per song (called “coin noraebang” in Korea) has recently become popular. Similarly, franchise laundry shops have changed the structure of the household laundry market and, hence, its business behavior. However, this aspect is ignored in this study owing to a lack of appropriate data. This is left to future research.
The results are not reported to avoid too many tables. We are willing to provide the results upon request.
Refer to footnote 11 for explanations on this new business model in the two industries.
This hypothesis is applicable to other countries. For example, Hatfield (2015) indicates that Spain has much higher rates of female self-employment than Denmark, which has higher social security payments and greater female attachment to the labor market.
Reviewing 18 empirical studies, Dvouletý and Lukeš (2016) conclude that most studies find positive effects of self-employment policies on employment status and personal income of former unemployed individuals and increased survival rates of subsidized businesses.
This policy recommendation is similar to that of the OECD (2014). The OECD (2014) states that many departing employees open small businesses, particularly in service industries that require low skills and little capital, resulting in low productivity, and it has indicated that developing the social safety net and raising the retirement age set by firms should go hand-in-hand with reforming the SME sector.
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This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2017S1A5A2A01024329).
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Sung, N., Kim, J. Entry and exit of small self-employed businesses in Korea’s service industries. Small Bus Econ 54, 303–322 (2020). https://doi.org/10.1007/s11187-018-0080-y
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DOI: https://doi.org/10.1007/s11187-018-0080-y