Start-ups out of Unemployment - Only Minor Impetus for Employment
ResearchStart-ups out of unemployment create far fewer jobs than other business start-ups. These are the findings of a joint study by KfW Bankengruppe and the Centre for European Economic Research (ZEW), Mannheim, which, for the first time since the introduction of the so-called Ich-AG (I Incorporated), analyses start-ups out of unemployment on a representative empirical basis.
About 75 per cent of the companies founded by once unemployed people are one-man businesses. The average number of employees is 2.0. For the sake of comparison: Just half of all other start-up companies are one-man businesses. The average number of employees is 3.9. Moreover, unemployed tend to establish businesses in rather less capital-intensive industries (e.g. construction and renovation trade, business services). The study focussed on start-ups between 2003 and 2004.
It suggests that once-unemployed entrepreneurs hardly differ from other founders in term of age, sex and education. However, they do have a significantly lower disposable income and their own financial resources affect the self-employment decision to a greater extent than it is the case for other founders. Still, that does not fully explain why they tend to invest less and hire fewer employees. Several indicators suggest that most unemployed people decide to start their own businesses to escape unemployment and not because they want to successfully bring to life their business ideas. These founders are eager to keep the financial risk to a minimum. Another reason to venture into self-employment supported by bridging allowances (Überbrückungsgeld) and start-up allowances, seems to be an extended entitlement to transfer benefits.
The results of the study indicate that one should therefore assess with some restraint the overall economic effects of start-ups out of unemployment concerning the creation of jobs, the promotion of structural change and the increase in competitiveness of the German economy. The study allows to draw the following conclusions:
- More efficient funding requires the ability to distinguish unemployed founders with viable business concepts from those, who primarily aim to extend their entitlement to transfer benefits. In this context, an important – but not sufficient – step was to tighten funding conditions for start-up allowances, which nowadays require the presentation of a business plan, just like the bridging allowances.
- Granting funds based on (at least partly) repayable allowances could be another measure worth thinking about. Repayment obligation could probably induce the founders to carefully verify the viability of their business concepts. Moreover, this step would significantly reduce the deadweight effect.
Contact
Dr. Georg Licht, Phone: +49(0)621/1235-177, E-mail: licht@zew.de