From unemployed to self-employed: Start-up subsidies can boost employment

A new report published today by IZA World of Labor shows how start-up subsidies can be used on a large scale to integrate unemployed workers back into the labor market with great success.

OECD countries spend considerable sums on active labor market policies, mainly on traditional measures including job creation schemes, training programs, and wage subsidies. But the overall effects have been disappointing. In a comprehensive report Marco Caliendo, of the University of Potsdam, summarizes the effectiveness of start-up subsidies in industrialized countries, focussing particularly on the success of the initiative in Germany.

Germany, which has used start-up subsidies on a large scale and evaluated them comprehensively, has been particularly successful in using this tool. Subsidies have been a major part of Germany’s active labor market policy for a decade. The current program (Gründungszuschuss) provides financial support to unemployed workers (and those at risk of unemployment) to start their own business. The average subsidy in this first phase is about €1,250 a month, or €7,500 for six months.

The start-up survival rate in Germany after 4.5 years is 60–70% and, on average, subsidized businesses in Germany have created 3.1 full-time jobs per business (?). Even if the business failed, unemployed workers who receive start-up subsidies had a 15–22 percentage point higher probability of being employed 4.5 years after starting-up a business than unemployed workers who did not start one.

The German case shows that start-up subsidies can be an effective policy for helping participants move out of unemployment and improve their labor market prospects. The research identifies several program elements that contribute to success, including emphasising that initial screening must be sufficiently stringent. The timescale of the subsidy should be neither too short, in order to allow time to overcome initial problems, nor too long, to avoid moral hazard. To help participants survive the initial stage of self-employment, when the business might not yield an adequate income, the financial component should cover basic living costs and social security contributions.

Full article: http://wol.iza.org/articles/start-up-subsidies-for-unemployed-opportunities-and-limitations/long

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Notes for editors:

• IZA World of Labor (http://wol.iza.org) is a global, freely available online resource that provides policy makers, academics, journalists, and researchers, with clear, concise and evidence-based knowledge on labor economics issues worldwide.
• The site offers relevant and succinct information on topics including diversity, migration, minimum wage, youth unemployment, employment protection, development, education, gender balance, labor mobility and flexibility among others.

Established in 1998, the Institute for the Study of Labor (www.iza.org) is an independent economic research institute focused on the analysis of global labour markets. Based in Bonn, it operates an international network of about 1,300 economists and researchers spanning more than 45 countries.