Academic Literature

Germany / New evidence on start-up subsidies and programs for unemployed youth – they work

‘In industrialized economies such as the European countries unemployment rates are very responsive to the business cycle and significant shares stay unemployed for more than one year.” writes Künn, Steffen in Unemployment and active labor market policy : new evidence on start-up subsidies, marginal employment and programs for youth unemployed. (Adapted choosen excerpts by Job Market Monitor to follow)

To fight cyclical and long-term unemployment countries spend significant shares of their budget on Active Labor Market Policies (ALMP). To improve the allocation and design of ALMP it is essential for policy makers to have reliable evidence on the effectiveness of such programs available. Although the number of studies has been increased during the last decades, policy makers still lack evidence on innovative programs and for specific subgroups of the labor market.

Using Germany as a case study, the dissertation aims at contributing in this way by providing new evidence on start-up subsidies, marginal employment and programs for youth unemployed.

The idea behind start-up subsidies is to encourage unemployed individuals to exit unemployment by starting their own business. Those programs have compared to traditional programs of ALMP the advantage that not only the participant escapes unemployment but also might generate additional jobs for other individuals. Considering two distinct start-up subsidy programs, the dissertation adds three substantial aspects to the literature:

  1. the programs are effective in improving the employment and income situation of participants compared to non-participants in the long-run.
  2. the analysis on effect heterogeneity reveals that the programs are particularly effective for disadvantaged groups in the labor market like low educated or low qualified individuals, and in regions with unfavorable economic conditions.
  3. the analysis considers the effectiveness of start-up programs for women. Due to higher preferences for flexible working hours and limited part-time jobs, unemployed women often face more difficulties to integrate in dependent employment.

It can be shown that start-up subsidy programs are very promising as unemployed women become self-employed which gives them more flexibility to reconcile work and family. Overall, the results suggest that the promotion of self-employment among the unemployed is a sensible strategy to fight unemployment by abolishing labor market barriers for disadvantaged groups and sustainably integrating those into the labor market.

The dissertation considers the impact of marginal employment on labor market outcomes of the unemployed. Unemployed individuals in Germany are allowed to earn additional income during unemployment without suffering a reduction in their unemployment benefits. Those additional earnings are usually earned by taking up so-called marginal employment that is employment below a certain income level subject to reduced payroll taxes (also known as “mini-job”). The dissertation provides an empirical evaluation of the impact of marginal employment on unemployment duration and subsequent job quality. The results suggest that being marginal employed during unemployment has no significant effect on unemployment duration but extends employment duration. Moreover, it can be shown that taking up marginal employment is particularly effective for long-term unemployed, leading to higher job-finding probabilities and stronger job stability. It seems that mini-jobs can be an effective instrument to help long-term unemployed individuals to find (stable) jobs which is particularly interesting given the persistently high shares of long-term unemployed in European countries.

Finally, the dissertation provides an empirical evaluation of the effectiveness of ALMP programs to improve labor market prospects of unemployed youth. Youth are generally considered a population at risk as they have lower search skills and little work experience compared to adults. This results in above-average turnover rates between jobs and unemployment for youth which is particularly sensitive to economic fluctuations. Therefore, countries spend significant resources on ALMP programs to fight youth unemployment. However, so far only little is known about the effectiveness of ALMP for unemployed youth and with respect to Germany no comprehensive quantitative analysis exists at all.

Considering seven different ALMP programs, the results show an overall positive picture with respect to post-treatment employment probabilities for all measures under scrutiny except for job creation schemes. With respect to effect heterogeneity, it can be shown that almost all programs particularly improve the labor market prospects of youths with high levels of pretreatment schooling. Furthermore, youths who are assigned to the most successful employment measures have much better characteristics in terms of their pre-treatment employment chances compared to non-participants. Therefore, the program assignment process seems to favor individuals for whom the measures are most beneficial, indicating a lack of ALMP alternatives that could benefit low-educated youths.

FireShot Screen Capture #2229 - 'OPUS - Unemployment and active labor market policy _ new evidence on start-up subsidies, marginal employment and programs for youth unemployed' - opus_kobv_de_ubp_volltexte_2012_6271

via OPUS – Unemployment and active labor market policy : new evidence on start-up subsidies, marginal employment and programs for youth unemployed.

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