Unemployment is a daunting problem that crisscrosses social, cultural, economic, and interpersonal circles. It can be defined as a market condition in which individuals are unable to find work despite being of suitable age and conditions and continuously making an effort to seek paid employment. 

The rate of unemployment in a labor market is calculated by dividing the number of unemployed people by the number of employed people. When the resulting figure is high, the economy is simply on fire. 

Everyone suffers a thing or two from widespread unemployment, but there is a popular notion that entrepreneurs stand to gain a lot. Supporters of this idea are quick to point out that unemployment creates an availability of skilled workers who are willing to settle for low wages. This is true, but it is not always the case. 

As we will see later in this article, unemployment could cause wage inflations, forcing entrepreneurs to raise employee wages regardless of the revenue inflow. Rather than being a jackpot for business owners, the situation, instead,

Limits the capacity of a business to run operations - due to high market prices;

Manage partnerships - due to the collapse of partner businesses or reprioritization of their expenses; and

Maintain/improve the benefits or work conditions of its employees - due to reprioritization of its expenses. 

This is enough to make any entrepreneur wish for a high economy where their business thrives and their employees enjoy competitive wages over the mere chance of hiring skilled workers for low pay. It summarizes why entrepreneurs care and why they rightly should care about unemployment. This article seeks to correct the notion that entrepreneurs enjoy unemployment periods by diving deep into the analysis of what it is and outlining the impact that most people fail to see.   

The Uncanny Relationship between Unemployment and Entrepreneurship 

“Entrepreneurship and growth have a dynamic relationship where one generates the other; unemployment spurs entrepreneurship, but entrepreneurship dampens unemployment; and growth dampens unemployment, but unemployment spurs growth.”

Above is an excerpt from the executive summary of the SBA Office of Advocay’s work by Jose M. Plehn-Dujowich on The Dynamic Relationship Between Entrepreneurship, Unemployment, and Growth: Evidence from U.S Industries. Research such as this has come to prove the complex but unique relationship that exists between unemployment and entrepreneurship.  

The excerpt outlines that unemployment drives people to venture into entrepreneurship and as they begin their business career, their activities help reduce the unemployment numbers. When entrepreneurship is on the rise, the Gross Domestic Product (GDP) of an economy experiences growth.

This goes further to decrease the level of unemployment in the labor market. Separately, the excerpt indicates that the existence of unemployment could inspire growth in the economy - possibly from a change of perspective towards manufacturing, selling, and exporting. 

Why Should You Care?  

You might be interested in knowing why an entrepreneur with or without workers (self-employed or normal entrepreneurs), and generating revenue, should care about unemployment statistics or situations. The answer is that unemployment brings lots of risks to existing businesses. 

Low Patronage and Business Revenue

In the study of economics, it is understood that people living within a low economy (such as one with a high rate of unemployment) drastically cut down on their expenses and reduce their demand even for essential goods or services including food, water, and electricity. Of course, this means low sales and crashing revenues for entrepreneurs. 

The problem could be so intense that it affects even essential businesses, such as the food markets and provision stores. The far-reaching impact also engulfs B2Bs that service these “essential” products or services stores and keep them running. 

Once “essential” businesses begin to experience low patronage and realize smaller revenues, they become unwilling to use many supplementary services either to lower their expenses or prioritize their expenditure. This creates a domino effect, essentially driving the issue of low patronage and dwindling revenues across several industries and businesses, and further stifling the economy. 

Rise of New Competitors

It is plain old psychology. Unemployment gives people all manners of ideas, including starting a business of their own. These new businesses might appear insignificant and many of them eventually fail. However, no matter how scarce the numbers, a few of them eventually succeed and amount to serious competition for already existing businesses. 

An instance of this is when a new and inexperienced business partners or merges with an average or struggling competitor business by sharing ideas and resources. It may significantly increase the market dominance of the new entity and drive other smaller competitors down the line. 

Remedy for Entrepreneurs

Entrepreneurs can work their way around the rise of new competitor businesses during major unemployment periods. Here are some steps they can take:

• Investing in Promising Startups:

Research shows that unemployment spurs entrepreneurship. As an existing business owner, you can address the rise of new competitor businesses by choosing to support and invest in new businesses that appear to offer similar products or services or serve your target market. Your company/business can move to create a partnership or undergo a merger with new and uprising competitors. However, we must remind you of the importance of making careful considerations before taking such a step.  

• Hiring Entrepreneurs Before They Become Competitors:

Entrepreneurs who are just breaking out from unemployment might have taken the time to study existing business processes or market conditions enough to identify a sweet spot for innovation. Being an older player, it is possible to launch talent hunt programs to identify and recruit unemployed individuals who are on the verge of building new businesses in the same market. 

Wage Inflation

Unemployment easily creates a wage and then a price inflation situation. This is expressed in Philip’s Curve economic theory. According to the theory, there is an inverse relationship between unemployment and inflation in the short run and a stable relationship in the long run. 

As a business owner, Philip’s Curve theory implies having to increase the wages of employees - especially those who are highly skilled, during periods of unemployment, to attract them to the team or persuade them to stay. Increasing wages generally raises corporate costs. Businesses respond to this new issue by raising the prices of goods and services to cover the increase in corporate costs, and that is how wage inflation and price inflation both take place during unemployment. 

Also, big companies that have a solid revenue mechanism and can afford to pay high in a low economy, may use wage inflation periods as an opportunity to acquire more talented workers from competitor companies.   

Businesses that fail to follow up on the unemployment situation within their economy will ultimately miss out on making necessary wage adjustments. They could lose some or all of their talented employees to this mistake. Unfortunately, rectifying the situation is not an easy step. It involves spending time, money, and resources in fresh hiring processes.

High Operational Costs

High operational cost is the unfavorable result of wage and price inflations caused by unemployment. This particularly impacts production or manufacturing businesses since they always need to purchase raw materials and other operational goods or services in order to develop their products.  

 If one production or manufacturing business considers the price of raw materials or plant management to be unbearable, it will be forced to push this cost onto customers by increasing the price of its finished products. 

Imagine that this finished product now serves as a raw material for another manufacturing business. In that case, the second business would experience exponential operational costs both from the price inflation in the economy and from the increased price of its raw materials.

This situation shows how the effect of unemployment from a simple rise in prices could impact businesses across the board and even force them to fold up and shut down operations. 

How to Hedge Your Business Against Unemployment 

Want to hedge your business against unemployment? Here are a couple of steps to take.

Unemployment Insurance:

Unemployment Insurance is a form of insurance that provides specific benefits to unemployed individuals. These people must meet certain criteria which is partly determined by their state, to be eligible for unemployment benefits. The four major criteria are: 

• available work history or experience of up to 18 months, 
• record of having earned a specific minimum salary determined by the state,
• determination that their unemployment status is not a result of their actions,
• active, weekly job search while collecting benefits. 

Entrepreneurs, especially the self-employed type, can buy in on unemployment insurance to secure themselves if they fall out of business. Purchasing this insurance gives them some leverage at the point of future unemployment. They can be certain of a supply of income between the time when their business stops working and when it eventually picks up again.  

Provision of Good Employment Conditions  

FlexJobs’ 2022 Career Pulse Survey reveals that “63% of the 4,000 respondents would choose better work-life balance over better pay—only 31% would choose better pay over work-life balance.” 

What this means is that not all employees are concerned about wage increases or pay raises. Some would comfortably settle for moderate pay as long as there is a conducive environment and considerable expectations.

Since some businesses are unable to make appropriate or satisfactory wage increases during a wage inflation-unemployment season, the above statistics point to a solution in providing other satisfactory employment conditions such as breaks, flexible work hours, and health plans for their employees. 

Acquire Multiple Asset Classes

The turmoils and economic downturns that come with unemployment could ruin the prices of several kinds of assets, including the popular or dominant ones. To hedge against this, it is advisable to have a diversified and well-thought-out asset portfolio. There’s no need to say that countless businesses have escaped folding up simply because they had a range of assets to fall back on and in today’s world, it is simply a good idea to have as many asset variety as possible.  A good point to note when choosing asset classes or making investments is how easy or difficult it is to liquidate such assets in the case of an emergency. 

Conclusion

The two points summary of this article is:

One, entrepreneurship is an economic activity in itself. It takes individuals outside the labor market and gives them authority over production, labor, and finances. This decision comes with risks and potential profits, but it ultimately reduces the level of unemployment within an economy. 

Two, unemployment figures and ratings concern entrepreneurs more than most people even realize. The risks that high unemployment presents to existing businesses are enough reason for entrepreneurs to work towards a stable and thriving economy. These risks have been detailed in the preceding sections of this article along with mitigation steps for entrepreneurs. 

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