The diversity of labor market institutions and entrepreneurship

Abstract

Substantial literature demonstrates that flexible labor market institutions promote entrepreneurial activity. We re-evaluate this finding by considering the complementarity between institutions as advocated by the varieties of capitalism literature. We study the relevance of labor market regulations, wage-setting institutions and social security, and their complementarity for different types of entrepreneurial activity in 19 European countries and the USA. Two findings stand out. First, the four distinct bundles of labor market institutions characterizing Europe support different forms of entrepreneurial activity, and that innovative entrepreneurial activity also exists in less-flexible and -regulated labor market arrangements. Second, the relationships between single labor market institutions and entrepreneurial activity vary across the four institutional constellations. Therefore, to promote entrepreneurship in Europe, there is a need for tailored reform strategies that consider the diversity of the institutional constellations.