When job loss in the family triggers entrepreneurship

`The decision to become an entrepreneur is shaped not only by individual characteristics but also by social environments´, says NHH researcher Jiaying Li.

Imagine a family where one sibling suddenly loses their job during a mass layoff. New research shows that this kind of shock can ripple through the family, prompting others to rethink their own job security and, in some cases, start a business.

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In her paper When Unemployment Risk Spreads: Family Spillovers and Entrepreneurship Jiaying Li uncovers a new channel through which social networks shape entrepreneurship: the transmission of unemployment risk. Using rich administrative data in Norway, she shows that bankruptcy-induced job displacement of an individual significantly increases the likelihood of their siblings' entrepreneurial entry.

In a new paper, Jiaying Li examines how sudden unemployment incidents raise perceived unemployment risk within families, affecting siblings’ decisions to enter entrepreneurship.

Jiaying Li is an Assistant Professor at the Department of Finance, NHH.

Norwegian data

Using detailed Norwegian register data, the study shows that job losses caused by employer mass layoffs can trigger entrepreneurial activity within families.

When one individual is displaced from work, their siblings become significantly more likely to start a business.

Jiaying Li

`When one individual is displaced from work, their siblings become significantly more likely to start a business, ´ Li says.

On average, a sibling’s probability of entering entrepreneurship increases by 0.4 percentage point, equivalent to a 20 percent rise compared with the overall average.

Gender differences

The study also reveals important gender differences. While the spillover effects are present when the focal individual experiencing a mass layoff is either male or female, the analysis shows that only male siblings are more likely to transition into entrepreneurship.

`The spillover effects are concentrated among male siblings and those with a relatively young age, ´Li explains.

In fact, the analysis finds suggestive, though not definitive, evidence that, the distress-driven job losses trigger a muted - even opposite – entrepreneurial response among female siblings.

`The muted response to job losses among women reflects gender-biased patterns in entrepreneurial activity, ´ Li says.

Driven by risk propagation

The findings cannot be explained by local labour market conditions or industry-specific shocks. The estimated increase in entrepreneurial entry remains robust even after accounting for economic developments across industries, occupations, municipalities, and time.

Instead, the study points to family networks as an important channel through which information about unemployment risk is transmitted.

The spillover effects are concentrated among male siblings and those with a relatively young age.

Jiaying Li

` This effect is weaker when communication between siblings is likely to be limited - for example, when there is a large age gap or among step-siblings,’ Li explains.

financially vulnerable

By contrast, the entrepreneurial response is stronger when siblings work in the same industry or share the same occupation.

`These patterns are consistent with the idea that job loss sends a more informative signal about labour market fragility to family members working in closely related labour markets,” she says.

Siblings whose own employers are financially vulnerable - such as those with high leverage or weak sales growth - also respond more strongly. This suggests that a job loss in the family can prompt siblings to reassess their own employment prospects.

I think the results highlight a previously overlooked social dimension of unemployment risk

Jiaying Li

`In these cases, unemployment events encourage siblings to question the security of paid employment and to consider entrepreneurship as an alternative,’ Li adds.

Previously overlooked

Importantly, there is no evidence of increased entrepreneurial activity in affected families before the job loss occurs, strengthening the interpretation that the shock itself drives the effect.

`I think the results highlight a previously overlooked social dimension of unemployment risk, ´ Li concludes:

`The study underscores the importance of accounting for family spillovers when evaluating the broader economic consequences of corporate distress. ´