The effect of local business climate on employment

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.