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Small Business Economics

Erschienen in:

01.06.2015

Subsidized start-ups out of unemployment: a comparison to regular business start-ups

verfasst von: Marco Caliendo, Jens Hogenacker, Steffen Künn, Frank Wießner

Erschienen in: Small Business Economics | Ausgabe 1/2015

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Abstract

Offering unemployed individuals a subsidy to become self-employed is a widespread active labor market policy strategy. Previous studies have illustrated its high effectiveness to help participants escaping unemployment and improving their labor market prospects compared to other unemployed individuals. However, the examination of start-up subsidies from a business perspective has only received little attention to date. Using a new dataset based on a survey allows us to compare subsidized start-ups out of unemployment with regular business founders, with respect to not only personal characteristics but also business outcomes. The results indicate that previously unemployed entrepreneurs face disadvantages in variables correlated with entrepreneurial ability and access to capital. Nineteen months after start-up, the subsidized businesses experience higher survival, but lag behind regular business founders in terms of income, business growth and innovation. Moreover, we show that expected deadweight effects related to start-up subsidies occur on a (much) lower scale than usually assumed.

Vorheriger Artikel Financial reporting quality and the cost of debt of SMEs

Nächster Artikel Entrepreneurship and the intergenerational transmission of values

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We use the term “non-subsidized” in the sense that individuals did not receive the start-up subsidy under scrutiny. However, this does not exclude receipt of other support, such as subsidized loans and counseling.

General evidence on how credit constraints restrict the start-up rate can be found in Evans and Jovanovic (1989), Holtz-Eakin et al. (1994) and Schäfer et al. (2011).

Banks tend to screen individuals with respect to their human capital in the sense that it is negatively correlated with credit default risk, which renders individuals with higher human capital more capable and thus better access to credit.

The survival-of-the-fittest mechanism states that due to competition and market selection, relatively high performing start-ups survive while low performing firms drop out the market (see Fritsch 2008).

This relies on the existence of asymmetric information, i.e., individuals who apply for the subsidy have more information than the institution that pays the subsidy. Once the subsidy is approved, the institution has no influence on the effort of the applicant. See Paulson et al. (2006) as an example for how moral hazard induces financial constraints on start-ups.

In Germany, every individual who has been in employment subject to social security for at least one out of the last three years is eligible for unemployment benefit I. The amount of the benefit consists of 60 % (67 % with children) of the last net wage and is basically paid for a period of 12 months, with the exception of older individuals (see Caliendo and Hogenacker 2012).

Without program participation, the individuals would loose their unemployment benefit entitlement given that they start their own business and hence work full-time.

In order to be eligible to SUS, founders have to set up their businesses full-time. Therefore, we compare them to all business start-ups that were also set up full-time.

The KfW start-up monitor is an annual cross-section population survey, which currently contains 50,000 individuals between 18 and 65 years. The microcensus is an annual representative survey capturing 1 % of the German population and currently contains around 700,000 individuals. For further information, see KFW Bankengruppe (2012) and Fritsch et al. (2012).

Subject to German law, liberal professions are defined as professions that require “higher vocational education or creativity,” such as medical occupations (e.g., physicians, dentists), consultants (e.g., lawyers, tax accountants), technical or scientific occupations (e.g., engineers, architects) and the cultural sector (e.g., writer, musicians).

In Germany, 80 Chambers of Industry and Commerce and 53 Chambers of Crafts exist in total.

The commercial register contains firms who are actively involved in trading activities (so that large firms tend to be overrepresented). Its main objective is to provide security to business partners in the sense that they can rely on recorded firm-specific characteristics such as name, legal form, location, executive directors and the ability to pay liabilities.

We note that having access to only one particular quarter of entrants might restrict the external validity of the results if the composition of business founders would change significantly over time. However, comparing the distribution of certain characteristics (e.g., age, education, migration, unemployment duration) across different quarters of entries into the subsidy program (based on the statistic of the Federal Employment Agency) does not show significant differences.

According to the reporting system of the German Kreditanstalt für Wiederaufbau, of all business start-ups in Germany, 21.4 % self-reported having started out of unemployment in 2009 (KfW Bankengruppe 2010).

Out of the initial sample of 2,303 individuals, 132 business founders were excluded from the data because they started out of unemployment. Out of the remaining sample of 2,171 observations, a further 642 founders who started their self-employment part-time were excluded.

See Caliendo and Künn (2015) for evidence on subsidized start-ups out of unemployment by females.

The German Federal Statistical Office reports for 2009 that 55 % of female entrepreneurs work 40 hours/week or more while this amounts to 86 % for male founders.

The KfW Bankengruppe (2009) reports that among all founders who started a business in full-time in Germany in 2009, 80 % invested capital at start-up (which is very similar to our estimation sample) from which 10.5 % invested 50,000 Euro and more (which is in the middle of the two groups under scrutiny).

See Caliendo and Lee (2013) and Krause et al. (2014) for similar applications using matching to perform decomposition.

This means that all subsidy recipients in the first quarter of 2009 (N = 31,365) created approximately 27,500 jobs until the end of 2010.

The capital-intensive first part of the subsidy payment, i.e., unemployment benefit plus lump-sum payment of 300 Euro/month, has already expired for 10 months, and the optional second part, consisting of the lump-sum payment of 300 Euro/month only, for four months.

See, e.g., Bundesministerium für Arbeit und Soziales und Institut für Arbeitsmarkt und Berufsforschung (2011).

We do not expect that misreporting is a big issue here because each respondent was informed (by a letter and at the beginning of each interview) that their answers will be treated absolutely anonymous and public institution such as the Employment Agency will have never access to the data.

We neglect results for the subgroup of 21.3 % that is potentially affected by deadweight effects using the broad definition (see Table 4) as we cannot assume that this group would have started out of non-unemployment (and hence belong to regular business founders). Here, the adequate control group would consist of non-subsidized start-ups out of unemployment, which is difficult to create as almost no unemployed person starts a business without the subsidy in Germany. However, point estimates using our available control group indicate a similar pattern as for the share of 8.6 %. Results are available online in the Supplementary Appendix (available at http://ftp.iza.org/dp8817_supplement.pdf).

See Caliendo and Kopeinig (2008) for a detailed discussion on the assessment of the matching quality and for an explanation of applied measures.

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Titel: Subsidized start-ups out of unemployment: a comparison to regular business start-ups
verfasst von: Marco Caliendo
Jens Hogenacker
Steffen Künn
Frank Wießner
Publikationsdatum: 01.06.2015
Verlag: Springer US
Erschienen in: Small Business Economics / Ausgabe 1/2015
Print ISSN: 0921-898X
Elektronische ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-015-9646-0

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