Unemployment and Business Formation Rates: Reconciling Time-Series and Cross-Section Evidence

Time-series analyses generally show rates of business formation increasing with unemployment. In cross-section studies the areas with the highest rates of formation are generally those with the lowest levels of unemployment. In a study using both types of data, the negative cross-section relationship is confirmed but it is suggested that the time-series may be nonlinear, becoming negative at a critical unemployment level around 20%. The paper concludes with a reconciliation of these findings.