Interview with Ai Jun Hou: Could Lowering Labor Protections Spur Entrepreneurship?

Jan. 09, 2025

A recent study reveals that unemployment risk can drive entrepreneurship, showing how changes to Sweden's strict "last-in-first-out" (LIFO) dismissal rules reshaped the labor market. These changes encouraged employees to start their own businesses without compromising quality. What lessons can policymakers draw from this? Read our interview with Ai Jun Hou (Stockholm University), one of the researchers behind the study.

What motivated you to start this research?

This research was motivated by the interplay between unemployment risk and entrepreneurial activity, particularly in Sweden’s context of strong social safety nets and labor market dynamics. The study sought to address how individuals transition to entrepreneurship when faced with job insecurity and to provide policy insights into fostering sustainable entrepreneurial ecosystems. Sweden's unique environment offered a valuable case to explore these questions.

Which of your findings surprised you the most?

One of the findings that surprised us the most was the strong role of unemployment risk as a motivator for entrepreneurship. One might worry that new entrepreneurs who were 'forced' into the risky venture due to the policy shock would perform worse, both in terms of business quality and personal income. However, we found that the nudged entrepreneurs perform on par with their counterparts.

Sweden has relatively few entrepreneurs compared to other OECD countries but ranks high in innovation, global success stories, and unicorns per capita. Some attribute this to a risk appetite fostered by strong social safety nets. Does your study explore this connection?

Yes, our study supports the idea that Sweden's strong social safety nets mitigate the financial risks of entrepreneurship, enabling individuals to take calculated risks. While entrepreneurship rates are low, the ventures pursued often lead to high-impact outcomes, such as innovation and successful global companies. This environment fosters a unique balance of cautious risk-taking that aligns with Sweden's reputation for innovation.

At what point does encouraging entrepreneurship through reduced job security become detrimental to society? Do your findings suggest policy changes that could strike a balance between job security and entrepreneurial activity?

Our findings show that moderate unemployment risk can encourage entrepreneurship. To support this, policies should aim to maintain job security while providing access to funding, training, and temporary benefits for entrepreneurs. Striking this balance helps build a sustainable entrepreneurial ecosystem without disrupting the labor market.

What aspects of entrepreneurship in Sweden differ most from other countries, based on your research?

Swedish entrepreneurs often leverage knowledge-intensive and innovative sectors, producing high-impact ventures despite relatively low entrepreneurship rates. This contrasts with countries where entrepreneurship is frequently a response to economic necessity or lack of social protections.

Does your research indicate which types of workers are most likely to thrive as entrepreneurs when faced with unemployment risk?

Our research shows that workers with portable skills, higher education, and prior entrepreneurial experience are most likely to succeed when facing unemployment risk. Those in creative or knowledge-driven industries and sectors with low capital requirements, also transition effectively.