“Labor demand side restrictions in areas with relatively bad labor market conditions generally increase entries into start-up programs as job offers are limited and starting an own business is an opportunity to leave unemployment. However, the survival of firms in deprived areas is also lower, such that the overall effect remains an empirical question” write Marco Caliendo and Steffen Künn in Regional Effect Heterogeneity of Start-Up Subsidies for the Unemployed.*
Recent microeconometric evaluation studies have shown that start-up subsidies for unemployed individuals are an effective policy tool to improve long-term employment and income prospects of participants, in particular compared to other active labor market programs (e.g. training, job search assistance or job creation schemes). What has not been examined yet are the potentially heterogeneous effects of start-up programs across regional labor markets.
The authors use a combination of administrative and survey data and observe participants in two distinct start-up programs in Germany for five years after start-up as well as a control group of unemployed who did not enter these programs. They add information on unemployment rates and GDP per capita at the labor agency district level to distinguish regional labor markets. Using propensity score matching methods they find supportive evidence that the founding process and development of businesses as well as program effectiveness is influenced by prevailing economic conditions at start-up.
From an Active Labour Market Policy perspective, the study shows that providing unemployed individuals the possibility to become self-employed (and hence escape unemployment) by offering the Startup programs has been a successful strategy. It effectively helped participants to overcome labor demand restrictions and to integrate them in the labor market in the long-run. Policy makers should therefore continue this strategy and provide such programs to unemployed individuals in the future. However, at the same time policy makers should be cautious in expanding the scale of such start-up programs programs (e.g., by increasing the amount/duration of the subsidy or lowering the entry criteria) due to three reasons: First, this might attract lower ability individuals who would actually not become self- employed under the current circumstances which might reduce the overall effectiveness of the programs. Second, subsidy programs are relatively costly and bear the risk of dead-weight effects, i.e., nascent entrepreneurs intentionally register unemployed to receive the subsidy. Third, although we find slightly better business performance in good areas, the authors cannot make a causal statement if subsidized start-ups out of unemployment are successful businesses yet. To make such a statement we would need to compare program participants to other business start-ups out of non-unemployment. This is an important question and future research should provide evidence on the empirical relevance of these three concerns.
* Adapted chosen excerpts by Job Market Monitor
A study shows that employees who leave their jobs with regular pay to start a business have a higher risk of not being able to resume their employee status if their business venture became unsuccessful
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