Publication on business formations out of unemployment in East and West Germany

A new study published by Christian Bergholz (Thünen Institute) together with Rolf Sternberg and Lennard Stolz (both Leibniz University of Hanover) and Johannes Bersch (ZEW Mannheim) examines spatial differences in the relationship between the regional unemployment rate and the number of business formations at the county level based on data from the Mannheim Enterprise Panel (MUP). The study covers the years 2012 to 2019, during which time around 1.2 million new businesses were founded in Germany. The focus of the studies is on both an east-west comparison and an urban-rural comparison.

The results show that, as unemployment rates rise, the number of business formations in Western Germany increases significantly more than in Eastern Germany, although unemployment is, on average, higher in Eastern German regions. This means that individuals in Western Germany react more sensitively to unemployment in the form of business formations than those in Eastern Germany. Using federal election data, results indicate that policy preferences on social policy, including state support for unemployment, differ systematically between Eastern and Western German regions, which in turn affects the willingness to start a business in response to unemployment.

Comparing urban and rural areas, the results show that the correlation between the unemployment rate and the number of business formations is positively influenced by the degree of rurality of a region. In other words, a higher degree of rurality strengthens the link between the unemployment rate and business formations. This finding can be explained by the presence of thin labour markets in rural areas. Within a realistically commutable distance, the supply of adequate jobs is, on average, lower in rural areas than in urban ones. As a result, the opportunity costs of starting a business following unemployment are lower in rural areas, which leads to higher business formation rates out of unemployment in these regions.

The corresponding article titled „Unemployment as a driver of entrepreneurship in Eastern and Western Germany“ has been published in the journal Regional Studies. Hyperlink: https://doi.org/10.1080/00343404.2025.2511713

The study was conducted as part of the cooperative project Rural Entrepreneurship. It was funded by the Federal Rural Development Program.

Contact: Dr. Christian Bergholz