Entrepreneurship and Labour Market Institutions

Abstract

In this paper, we extend the theory of entrepreneurship to incorporate the effects of labour market institutions. Enterprise formation, wage determination, and optimal firm size are examined in an occupational choice model under two alternative wage-formation mechanisms. Our benchmark case with competitive labour markets shows that the entrepreneurship, firm size and the wage rate are all determined by the underlying technology. With union power in wage setting, standard results hold: firm size and the wage rate also depend on the relative bargaining power and unemployment compensation. There is a further implication: our main result indicates that, in the union model, the equilibrium rate of entrepreneurship decreases in the union's strength in wage setting. JEL Classification: J23, J24, J51, M13