Right of association and new business entry: country-level evidence from the market sector

Abstract

Labor market institutions (LMIs) could enable new firm entry by lowering burdens to attracting and retaining human capital or restrict new firm entry by increasing concerns of additional demands on ventures facing liabilities of newness and smallness. In this study, we focus on the LMI of the right of association, and whether its relationship with new business entry depends on the vertical ordering of bargaining (represented in the centralization of collective bargaining) or the horizontal synchronization of wage-setting (represented in the coordination of wage-setting). In a panel of 44 countries covering the period 2005–2019, we find that the right of association in the market sector is positively associated with new business entry; however, with increasing centralization of collective bargaining, the association becomes negative. Coordination of wage-setting does not significantly affect the relationship between the right of association and new business entry. The results are robust to accounting for both serial correlation and cross-sectional correlation in the panel regressions and carry implications for policymakers regarding the effects of LMIs on new business creation.

Plain English Summary

Does the right of association influence new business entry? Labor market institutions (LMIs) in a country could be a double-edged sword for new businesses: LMIs can lower human capital competition among smaller and larger firms, but may also increase financial burdens on young and small firms in meeting higher wages and benefits. We find that the right of association in the market sector is positively associated with new business entry; however, with increasing centralization of collective bargaining, the association becomes negative. Coordination of wage-setting does not significantly affect the relationship between the right of association and new business entry. Thus, the principal implication of this study is that labor market institutions may be ex-ante considerations in new firm entry decisions, and the right of association in combination with strong centralization of collective bargaining may jointly lower new business entry.