Unemployment is adversely affecting the economic and social welfare of societies in many countries. To address this problem, promoting entrepreneurship is suggested by many scholars and organizations.
However, the relationship between unemployment and entrepreneurship is ambiguous. While some studies find a positive link between unemployment and entrepreneurship (the refugee effect, still others find evidence supporting a negative relationship (the Schumpeter effect. Based on empirical evidence from OECD countries, the relationship between unemployment and entrepreneurship is both negative and positive. Changes in unemployment clearly have a positive impact on subsequent entrepreneurship. At the same time, changes in entrepreneurship have a negative impact on subsequent unemployment (Audretsch, 2002).
There are several factors which determine the level of entrepreneurship in a given country. Social and cultural attitudes, religion, gender gap, access to finance, access to education and training for entrepreneurship, rules and regulation are some of the determinants of entrepreneurship.
The Government of Ethiopia has recognized and paid due attention to the promotion and development of MSEs and designed MSE Development and Promotion Strategy in 2004 to address the challenges of unemployment, economic growth and equity in the country. However, the entrepreneurs which are working in MSEs are facing many challenges.
This paper is contains conceptual definitions of unemployment and entrepreneurship, the relationship between unemployment and entrepreneurship, some best practices in youth entrepreneurship, Unemployment and Entrepreneurship (MSEs) in Ethiopia, and conclusion and recommendation.
2. Conceptual Definitions of Unemployment and Entrepreneurship
Unemployment
2.1.1 Definition of Unemployment
The labor force statistics divide the adult population into three groups: the employed, the unemployed and the inactive, i.e. people out of the labor force (Brandolini, et al. 2004).
The concept of unemployment seems simple to understand by everyone. However, its measurement is not straightforward and rests on a number of arbitrary choices. According to (ILO, 1990) unemployment is measured based on the following three criteria: i) without work ii) available for work and iii) seeking for work. However, this definition varies in the context of developing and developed countries. In the developed countries where the labor market is largely organized and labor absorption is adequate, the standard definition of unemployment is more convenient, which relies on the seeking for work criteria.
On the other hand, in developing countries like Ethiopia, where there is no strong labor market information and limited scope, labor absorption is inadequate or where the labor force is predominantly self employed, it was felt that the above standard definition with its emphasis on seeking for work criteria might have had limited relevance, somewhat restrictive and might not fully capture the prevailing employment situation. Hence, the International standard introduced a relaxed definition of unemployment which allows for the relaxation of the seeking for work criteria in certain situations. The relaxed definition of unemployment, which suits the Ethiopian labor market situations includes those persons who had no work but available for work, those persons who were or were not seeking for work or discouraged job seekers. Discouraged job seekers are those unemployed persons who want a job but did not take any active step to search work because they thought that job is not found in the labor market. (CSA, 2011)
Types of Unemployment
According to the Reserve Bank of Fiji Economic Focus, (2004), there are various reasons why a person is unemployed. These reasons can be categorized by one of the four types of unemployment that exist in an economy during a particular time. These include:
A. Cyclical Unemployment: it occurs when an economy is in recession, that is, when there is a decline in total production and demand in an economy. During this time, employers may need fewer employees to meet the lower levels of demand. However, when the economy strengthens, the demand for goods and services returns and employers start to hire more workers to meet the new higher levels of consumer demand.
B. Seasonal Unemployment: It is usually more common in the agricultural sector where production is typically seasonal. The sugar industry is one such example. Cane cutters and sugar mill workers may be unemployed when the cane cutting and crushing season is over. However, they are likely to be reemployed when the planting season begins or when the crushing season commences.
C. Structural Unemployment: It refers to workers who are displaced from their existing jobs because of developments in technology or due to new levels of skills required to do the job. For example, people available with typewriting skills may not be able to find jobs because employers demand employees with computer skills.
D. Frictional Unemployment. It arises when workers leave their current job in search of better jobs. It may be noted that, this type of unemployment relates to the period in which the workers leave their existing jobs and until they find their new employment.
Entrepreneurship
2.2.1 Definition of Entrepreneurship
According to Ahmad and Seymour (2008), "entrepreneurs are taken as (business owners) 'who seek to generate value, through the creation or expansion of economic activity, by identifying and exploiting new products, processes or markets" (cited in Desai, 2009).
As many scholars stated, the entrepreneur has worn many faces and fulfilled many roles. At least thirteen distinct roles for the entrepreneur can be identified in the economic literature (Wennekers and Thurik, 1999):
1. The person who assumes the risk associated with uncertainty. 2. The supplier of financial capital. 3. An innovator. 4. A decision-maker. 5. An industrial leader. 6. A manager or a superintendent. 7. An organizer and coordinator of economic resources. 8. The owner of an enterprise. 9. An employer of factors of production. 10. A contractor. 11. An arbitrageur. 12. An allocator of resources among alternative uses. 13. The person who realizes a start-up of a new business.
As Storey (1991) explained, multiple measures of 'entrepreneurship' exist and reflect different types of activities. Self-employment is often used as to measure entrepreneurship. However, it may not adequately capture the level of entrepreneurship in developing countries. Self-employment may be measured from official self-reported employment data and would likely leave out unreported (informal) respondents (cited in Desai, 2009).
Although the overlap between self-employment and necessity entrepreneurship in developing countries leads to a very different mean of self-employment than in developed countries, it is a good proxy for entrepreneurial activity and can be interpreted to some extent as a measure of entrepreneurial potential (ibid,2009).
Determinants of Entrepreneurship
According to Remeikiene and Startiene (2009), the economic and cultural factors Such as gender gap, religion, cultural differences, and the economic situation in the country are regarded as determinants of entrepreneurship. Until now, little is known how religion can influence the choice of person's profession, but tests carried out (Audretsch, Boente, Tamvada, 2007) in India showed that religion shapes the entrepreneurial decision. In particular, some religions, such as Islam and Christianity, are found to be conducive to entrepreneurship, while others, such as Hinduism, inhibit entrepreneurship. In addition, the Caste system is found to be an obstacle to become an entrepreneur. Individuals belonging to a backward Caste exhibit a lower propensity to become an entrepreneur.
The education and training systems have the opportunity to influence the level of entrepreneurial activity in transition and developing economies, where new and innovative enterprise creation is a priority. A recent study conducted in 14 OECD countries indicate that 19% of entrepreneurs interviewed associated the level of entrepreneurial activity in their country with lack of financing, 17% with the lack of education and training for entrepreneurship, 16% with negative cultural and social attitudes, and 15% with burdensome regulation(OECD, 2001).
3. The Relationship between Unemployment and Entrepreneurship
3.1 The Effect of Unemployment on Entrepreneurship
The relationship between unemployment and entrepreneurship is full of ambiguity. On the one hand, the simple theory of income choice, which has been the basis for numerous studies focusing on the decision confronted by individuals to start a firm and become an entrepreneur (Blau, 1987; Evans and Leighton, 1990; Evans and Jovanovic, 1989; and Blanchflower and Meyer, 1994) suggests that increased unemployment will lead to an increase in startup activity on the grounds that the opportunity cost of not starting a firm has decreased. On the other hand, the unemployed tend to possess lower endowments of human capital and entrepreneurial talent required to start and sustain a new firm (Lucas, 1978; Jovanovic, 1982) cited in Audretsch, et al. (2001), suggesting that high unemployment is associated with a low degree of entrepreneurial activities.
The relationship between unemployment and new firm formation is not clear-cut. The analytical problem involved in examining the impact of unemployment on new enterprise formation is an antithesis between the so-called "push" and "pull" hypotheses. The push motivation can be defined as circumstances wherein an individual feels forced to establish a new enterprise due to negative labor prospects, such as personal unemployment and job insecurity. In these situations, individuals may consider the formation of a business as their best choice (Storey, 1991; Marlow and Storey, 1992; Tervo and Niittykangas, 1994) cited in Jari Ritsilä and Hannu Tervo (2002).
The potential effects of unemployment on new firm formation exist at three different levels, viz.: the personal level, regional level and national level. Both pull and push forces may operate at each of these levels.
First, the likelihood of choosing to found a business is related to the employment status of a worker. Because of the push factors, unemployed workers may have a greater propensity for becoming self-employed than employed workers (Evans and Leighton, 1990; Storey, 1982; Storey, 1991; Meager, 1992; Audretsch, 1993; Thomas and Jungbauer-Gans, 1999).
Second, regional unemployment differentials may have an effect on new firm formation. The relationship between regional unemployment disparities and firm formation is ambiguous. Previous studies provide evidence for both push and pull effects (see e.g. Hamilton, 1989; Storey, 1991; Tervo and Niittykangas, 1994; Spilling, 1996). The push hypothesis argues that high regional unemployment incites self- employment and, consequently, regions with high unemployment have a high rate of new firm formation (Storey, 1991; Keeble and Walker, 1994; Reynolds et al., 1994) cited in (Jari Ritsild and Hannu Tervo, 2002). According to this argument, self employment is considered as the last resort to ensure respectable livelihood in regions of high unemployment. The public sector also encourages entrepreneurship in these regions. On the other hand the pull hypothesis argues that a low local level of unemployment has a positive effect on new firm formation and, conversely, high local unemployment prevents firm formation. A low regional unemployment level indicates a high level of local demand as well as regional competitiveness and growth. It can be assumed that in such circumstances individuals are attracted into starting businesses. In contrast, regions with a high unemployment level are lagging behind in an economic sense and their demand is at a low level. Long or frequent spells of unemployment also tend to lead to deterioration in labor force activity, and further on, to a weakening in the quality of human capital/labor force. This may result in "a vicious cycle", in which backwardness breeds further backwardness. Long or frequent spells of high local unemployment would certainly make the survival of newly based firms more insecure, and make the plans to ground a new business much less inviting (Jari Ritsild and Hannu Tervo,2002)
Third, a high level of overall unemployment (business cycle effect) can be assumed to decrease new firm formation (e.g. Storey, 1991; Audretsch, 1993). The pull effect dominates at the national level. In a period of high national unemployment, both internal and external demand for local goods and services are low, and thus the survival possibilities of new firms are relatively slight. Because of the decreased probability of survival, an individual is faced with greater uncertainty (cost) and lower rates of return from becoming an entrepreneur (ibid).
Cowling and Mitchell (1997, pp.427, 434) found that: "Self-employment is a last resort for certain individuals marginalized in the employed sector and facing lengthy spells of unemployment. Initially, the short-term unemployed can compete for waged employment and are re-employed, thus tending to lower the proportion of the workforce in self-employment. But as unemployment spells lengthen these individuals become the long-term unemployed. At the same time the likelihood of obtaining waged employment diminishes and self-employment becomes a last resort option for long-term unemployed people". Based on this, Cowling M. and Bygrave W. (2002) hypothesize when unemployment rates are high, necessity entrepreneurship rates will be high. The study is concerned with the people who are involved in entrepreneurial activity because they have no feasible outside alternatives in the labor market. They studied through survey in 37 nations, participating in Global Entrepreneurship Monitor (GEM) 2002. They found that there is equal but, opposite effect of labor market and demand side effect. Demand-side effects means low demand due to high unemployment, dominate when people are further down the path to starting their own business. On the other hand, labor market effect at earlier stages dominates, i.e. not seeing any feasible alternatives in the labor market. Finally they suggest that that people's response to observed unemployment is dependent upon the stage they are at in the business inception process.
The ambiguities found in the empirical evidence reflect these two conflicting forces. For example, Evans and Leighton (1990) found that unemployment is positively associated with a greater propensity to start a new firm, but Garofoli (1994) and Audretsch and Fritsch (1994) found that unemployment is negatively related to new-firm startups, and Carree (2001) found that no statistically significant relationship exists. Furthermore, Ghavide, et al. (2011) estimated the effect of unemployment on entrepreneurship (Refugee Effect) in 23 developed and 7 developing countries. They found a coefficient which is statistically insignificant. When they add the square of unemployment rate was negative. Finally, they suggest that the impact of unemployment rate on entrepreneurship (Refugee Effect) increased first and then decreases.
Ritsild and Tervo (2002) studied the effect of unemployment on new firm formation in Finland at different level i.e. personal, regional and national level and they tried to differentiate which factor (either push or pull) dominate in which level. They found that, personal unemployment seems to increase the likelihood of self employment in non-linearly. However, the coefficient of region was not statistically significant. Thus, the result cannot show that unemployment has an effect on new firm formation at the regional level because this may be due to the fact that the push and pull forces are of equal size, the net effect being nil. Finally, unemployment at the national level seems to have a clear effect on entrepreneurship. A high national level of unemployment decreased the likelihood of new firm formation.
3.2 The Effect of Entrepreneurship on Unemployment
As Baumol (1993) explained, the key contribution of entrepreneurship to economic growth can be stated as being or creating newness. This includes not only the start-up of new firms but also the transformation of inventions and ideas into economically viable entities (cited in Thurik, 2003). Newness through start-ups and innovations as well as competition is the most relevant factor linking entrepreneurship to economic growth. Entrepreneurship by stimulating growth leads to a reduction in unemployment. Therefore there is a causality link that runs from entrepreneurship to unemployment, and the relation is negative (Faria et al. 2008).
The relationship between unemployment and entrepreneurship is full of ambiguity. On the one hand, one strand in the literature has found that unemployment stimulates entrepreneurial activity, which has been termed as a refugee effect. On the other hand, higher levels of entrepreneurship reduce unemployment, or what has been termed as a Schumpeter effect (Audretsch et al.2002).
As it is suggested by many scholars and organizations, entrepreneurship is a best solution for high unemployment and stagnant economic growth. For example, Japan is an interesting case having a high degree of entrepreneurship (in terms of small firms or business ownership) with low levels of unemployment. The establishment of new firms creates jobs, leading to a subsequent decrease in unemployment. In Japan, entrepreneurship significantly lowers unemployment but it takes a lag of eight years before the ('Schumpeter') effect realizes. Only after some time, the new entrants contribute to economic growth, either by growing themselves or forcing incumbent firms to enhance their performance by way of increased competition (van Stel, et al, 2008).
It is generally assumed that there is a two-way causation between changes in the level of entrepreneurship and that of unemployment: a 'Schumpeter' effect of entrepreneurship reducing unemployment and a 'refugee' or 'shopkeeper' effect of unemployment stimulating entrepreneurship (Thurik, 2003).
4. Some Best Practices in Youth Entrepreneurship
A number of young people are taking up the challenges of starting their own business, and much is being learned about how the odds for success can be improved through various types of assistance and the creation of a supportive environment. To succeed in self-employment and become productive entrepreneurs, young people require assistance with training, mentor support, access to credit and office facilities, as well as support when expanding a business and developing networks. In this section best experiences of some African countries are discussed (African Youth Report, 2011).
Promoting Youth Entrepreneurship in Algeria
In 1996, the Government of Algeria created the National Agency for the Support of Youth Employment. The Agency provides counseling and other forms of support for young entrepreneurs and assists them in project implementation. It mainly targets unemployed individuals between the ages of 19 and 35 who possess the necessary professional qualifications and/or practical experience and can contribute 5 to 10 per cent of the investment required. It helps young entrepreneurs financially by providing lines of credit at 0 per cent interest and interest subsidies on bank loans.
Its decentralized network extends across the country, for information and to receive the available fund. The network has been electronically linked since 2002, and a database has been set up with information on young entrepreneurs and their businesses.
By the middle of 2005, more than 65,000 microenterprises had been created, and by 2007, the investment total had reached around 114 billion dinars (US$ 6 billion). These small businesses are believed to have generated more than 186,000 direct employment opportunities.
Mentoring of Young Entrepreneurs by Private Firms in Senegal
Self-employment creates over 90 per cent of new jobs in Senegal; however, many young people face considerable barriers in starting their own businesses. Since, the minimum cost of setting up a formalized business is high, to overcome such barriers, the Synapse Centre, a Dakar-based non-governmental organization, started off in 2003 with this in mind. Synapse was designed to allow young people with potential to use their energy and skills to create successful businesses that would not only contribute to overall economic growth and job creation, but also provide social benefits to their communities.
The Synapse Centre provides its 14-month Promise Programme - a highly intensive, hands-on youth entrepreneurship training programme that combines traditional entrepreneurship theory with interactive case-based studies, practical entrepreneurial experience, personal development, retreats and professional business consulting, and mentoring.
The objective of the Promise Programme is to ensure that each young person who participates in it establishes a successful, sustainable and growing business which in turn gives something back to society. Synapse's annual budget of US$ 80,000 means that one job has been created for every US$ 584 spent. The experience of Synapse has shown that the increased self-confidence resulting from the mentoring initiative enables entrepreneurs to expand their personal vision as well as to explore a leadership experience that they otherwise might not have acquired (African Youth Report, 2011).
5. Unemployment and Entrepreneurship (MSEs) in Ethiopia
In Ethiopia there is high unemployment problem, which is adversely affecting the society's welfare. The 2011 urban employment unemployment survey (UEUS) result reveals that the overall unemployment rate is 18.0 percent and the corresponding male and female unemployment rates are 11.4 per cent and 25.3 per cent, respectively. The differentials of unemployment by sex also show that female's unemployment is more than two times as compared to males (CSA, 2011).
The Government of the Federal Democratic Republic of Ethiopia has recognized and paid due attention to the promotion and development of MSEs for they are important vehicles to address the challenges of unemployment, economic growth and equity in the country. To this effect, the government has formulated a National MSE Development and Promotion Strategy, which enlightens a systematic approach to alleviate the problems and promote the growth of MSEs.
The Micro and Small Enterprises sector is described as the national home of entrepreneurship. It provides the ideal environment enabling entrepreneurs to exercise their talents to the full and to attain their goals. In all the successful economies, MSEs are seen as an essential springboard for growth, job creation and social progress at large.
Although, small and micro enterprise activities have absorbed a large number of unemployed people, they are not always in a position to generate remunerating long-term jobs. Therefore, support for MSEs has to include skill upgrading programs for MSE operators and strengthening the use of appropriate modern technologies that boost their capacity to create long-term jobs.
To achieve this objective, the government designed MSEs development strategy in 2004. The strategy has the following objectives: Facilitate economic growth, Bring equitable development, Create long-term jobs, Strengthen cooperation between MSEs, Provide the basis for medium & large-scale enterprises, Promote export and Balance preferential treatment between MSEs & bigger enterprises.
The elements of the support program include measures with regard to creating an enabling legal framework and streamlining regulatory conditions that hinder the coming up of new and expansion of existing MSEs. In addition, the specific support program also include measures related to facilitating access to finance, provision of incentives, promotion of partnerships, training, access to appropriate technology, access to market, access to information and advice, infrastructure and institutional strengthening of the private sector associations and chambers.
However, MSEs are constrained by the various structural and institutional related problems and bottlenecks. Lack of smooth supply of raw materials and working premises were reported to be the major bottlenecks facing small scale manufacturing industries, while lack of sufficient capital and working premises were the leading problems of the informal sector operators to start their businesses.
6. Conclusion and Recommendation
Conclusion
Unemployment is one of the greatest challenges many countries are facing. To solve the unemployment problem many governments take different policy measures. Promoting entrepreneurship is among the policy measures that governments of many countries take to solve the unemployment problem. Entrepreneurship is a best solution for high unemployment and stagnant economic growth. Japan is an interesting case having a high degree of entrepreneurship (in terms of small firms or business ownership) with low levels of unemployment.
The relationship between unemployment and entrepreneurship is however not straightforward. On the one hand, unemployment stimulates entrepreneurial activity, which has been termed as a "refugee effect". On the other hand, entrepreneurship reduces unemployment, or what has been termed as a "Schumpeter effect".
Although increased unemployment will lead to an increase in startup activity due to the fact that the opportunity cost of not starting a firm has decreased, high unemployment is also associated with a low degree of entrepreneurial activities since the unemployed tend to possess lower endowments of human capital and entrepreneurial talent required to start and sustain a new firm.
Social and cultural attitude, religion, gender gap, lack of access to finance, lack of education and training for entrepreneurship and burdensome regulation are some of the determinants which adversely affect entrepreneurship.
The Government of Ethiopia has recognized and paid due attention to the promotion and development of MSEs and designed MSE Development and Promotion Strategy in 2004 to address the challenges of unemployment, economic growth and equity in the country.
Facilitating access to finance, provision of incentives, promotion of partnerships, training, access to appropriate technology, access to market, access to information and advice, infrastructure and institutional strengthening of the private sector associations and chambers are among the specific support program measures designed to achieve the objective of the strategy.
However, MSEs are constrained by the various structural and institutional related problems and bottlenecks. Lack of smooth supply of raw materials and working premises were reported to be the major bottlenecks facing small scale manufacturing industries, while lack of sufficient capital and working premises were the leading problems of the informal sector operators to start their businesses.
Therefore, solving the factors that adversely affect the level of entrepreneurship should be a priority area to reduce unemployment and achieve sustainable economic growth.
6.2 Recommendations
Government officials should provide incentives that encourage entrepreneurs to risk attempting new ventures by providing laws that enforce property rights and encourage a competitive market system.
The government should provide necessary awareness creation to solve the social and cultural attitudes which negatively affects entrepreneurship
The education and training system should be designed in a way that can promote entrepreneurship and skill upgrading trainings should be given to the needy.
The government should solve financial and burdensome regulation problems which constrain the development of entrepreneurship.
