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Start-ups by the unemployed: characteristics, survival and direct employment effects

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Abstract

Fostering and supporting start-up businesses by unemployed persons has become an increasingly important issue in many European countries. These new ventures are being subsidized by various governmental programs. Empirical evidence on skill-composition, direct job creation and other key variables is rather scarce, largely because of inadequate data availability. We base our analysis on unique survey data containing a representative sample of over 3,100 start-ups founded by unemployed persons in Germany and subsidized under two different schemes: the bridging allowance (BA) and the start-up-subsidy (SUS). We are able to draw on extensive pre- and post-founding information concerning the characteristics of the business (start-up capital, industry, etc.) and of the business founders (education, motivation, preparation, etc.). Our main results are: (1) The two programs attracted very different business founders (higher skilled for the BA, more female persons for the SUS), and different businesses were created (less capital intensive for the SUS). (2) We find that formerly unemployed founders are motivated by push and pull factors. (3) Survival rates 2.5 years after business founding are quite high (around 70%) and similar for both programs and across gender. (4) However, the newly developed businesses differ significantly in terms of direct employment effects. While around 30% of the founders with the BA already have at least one employee, this is true for roughly 12% of the founders with the SUS.

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Notes

  1. See, for instance, the EU Community Initiative EQUAL, which is funded through the European Social Fund to test inter alia new ways of effectively supporting start-ups by unemployed persons.

  2. For a more general discussion on the value of entrepreneurship and a recent survey on empirical evidence, see van Praag and Versloot (2007). Blanchflower and Oswald (2007) report another possible benefit on the individual level. Based on cross-country evidence they show that self-employed individuals have higher job- and life-satisfaction (when compared to similar employees).

  3. For some earlier evidence in different European countries, see, e.g., Storey and Jones (1987), Evans and Leighton (1990), Storey (1991), Audretsch and Vivarelli (1995), Hinz and Jungbauer-Gans (1999), Pfeiffer and Reize (2000) and Andersson and Wadensjö (2007).

  4. In 2005 the spending on start-up subsidies absorbed roughly 17.2% of all the spending on ALMP in Germany, whereas the EU-15 average was below 5% (European Commission 2005).

  5. The ‘Hartz reforms’ were (and still are) a large reform of the German labor market, adjusting active and passive labor market policies. Within the reform process, resources were shifted away from traditional active labor market policy programs—like job creation schemes and vocational training programs—to more innovative measures like start-up subsidies and short training programs (see Caliendo and Steiner 2005, for an overview).

  6. Both programs were replaced in August 2006 by a single new program—the new start-up subsidy program (Gründungszuschuss)—which will not be analyzed here.

  7. Most yearly surveys on general start-up activities (such as the General/Regional Entrepreneurship Monitor(s), the KfW start-up monitor or the micro-census) and previous studies on start-ups by unemployed persons (such as the articles of Hinz and Jungbauer-Gans 1999 or Pfeiffer and Reize 2000) had, and have, access only to a relatively small and non-representative number of observations (in terms of the absolute number of start-ups by unemployed persons all studies are based on less than 300 observations) and only to a limited amount of socio-demographic and economic variables. Moreover, all studies, with the exception of Hinz and Jungbauer-Gans (1999), argue without having any evidence on motivational variables that start-ups by the unemployed are mostly or only driven by push-motives.

  8. As the labor market situation and the development of new start-ups differ between West and East Germany (due to the economic transformation of East Germany), we focus on West Germany in this paper. For previous evidence on the differing developments, see for instance Fritsch (2004) and Kronthaler (2005).

  9. See, e.g., Blanchflower and Oswald (1998), and Johannson (2000), on the importance of start-up capital and capital constraints for becoming self-employed.

  10. It should be emphasized that persons kept their claims for remaining unemployment benefits for 4 years after their start as a self-employed. Thus, they had a high incentive to return into unemployment if they failed as self-employed.

  11. Access to this program was eased in 2002. Until 2002, persons had to stay unemployed for a minimum of 1 month before they were allowed to apply for the BA. From 2002 onwards, it was possible to apply for the BA right away from the first day of unemployment.

  12. See Koch and Wießner (2003) for details.

  13. For further details on the intentions of having introduced SUS as a second program in addition to the BA, see the report of the Hartz-Kommission (2002). See Table 1 for more details on both programs.

  14. It should be noted that unemployed individuals can in principle participate in any of the mentioned programs. Their case worker in the local labor office assesses their needs and makes suggestions based on this assessment and the local situation. One difference between the start-up subsidies and the other programs is that individuals could not be assigned against their will in the start-up subsidies. Once an individual participates in one program, he or she is not allowed to participate in another one at the same time.

  15. See Caliendo and Kritikos (2009) for further details on the new program.

  16. All existing statistics suffer either from the problem of under- or over-estimation of the yearly number of start-ups. Moreover, almost none of the sources is able to reveal how many of the founders started businesses out of unemployment; that is why we are able to present only some broad trends. For further details, see Fritsch et al. (2002) or Kritikos and Kahle (2006).

  17. Caliendo et al. (2009) analyze—based on the German Socio-Economic Panel (SOEP)—the risk-attitudes of nascent entrepreneurs in 2004 and show that during this period about every second person started self-employment out of unemployment. However, since the data cover only 150 business founders, it is too small for an annual analysis of whether the growth in start-ups by unemployed persons had a direct effect on the number of self-employed.

  18. Similar trends were also observed in smaller samples; see Hinz and Jungbauer-Gans (1999), Kreditanstalt für Wiederaufbau (2006) or Wagner (2007). However, only the micro-census—due to its larger sample size—allows one to point out the change in the share of female start-ups.

  19. The micro-census reveals a similar trend among the stock of self-employed persons: share of those having finished upper secondary schooling among self-employed persons is around 41%, whereas among all employed persons it is only 29%, c.f. Statistisches Bundesamt (2005).

  20. In 1991, the same report (micro-census) had estimated about 3 million persons in self-employment.

  21. This tendency is expected to be sustained in the future: the micro-census observed that only 20% of all start-ups in the year 2005 employed other persons, whereas in 1996 30% of them offered jobs to others (for all figures, cf. Piorkowsky 2008).

  22. Moreover, the subsidy had a mandatory use, as the participants were obliged to pay the money into the social security system. Thus, it had only an indirect effect on the income of the observed participants and could not be used for covering the cost of living.

  23. Health constraints do not play a major role; the majority of participants indicate having no such constraints.

  24. Similar trends were observed by Levenson and Willard (2000) in US data and by Parker and van Praag (2006) in Dutch data.

  25. As we mentioned in the last section, we expect that the survival rates of SUS will adjust in a similar modest way to those of the BA once the support with SUS runs out.

  26. It should also be mentioned that in ten OECD countries failure rates of newly founded businesses, after 2 years, are between 20 and 40% (see Bartelsmann et al. 2005).

  27. We are fully aware that direct employment effects are only one part of all effects of newly created businesses. For further analysis of indirect positive and negative effects in the case of Germany, see Fritsch and Müller (2008), who identified an S-shaped employment effect of newly formed businesses. See also Fritsch (2008) for an overview of similar analysis conducted for various other countries. However, the aim of our study is different. We primarily aim to analyze to what extent start-ups by unemployed persons create further jobs, if at all.

  28. There are several other sources providing such information. However, the share of solo entrepreneurs is under-represented in most of these sources as there have been regular reports of the share of start-ups with further employees being higher than what is reported in the micro-census. For instance, Hinz and Jungbauer-Gans (1999) report that in 1996 only 53% among the formerly employed and 76% among the formerly unemployed founders were sole entrepreneurs, while the micro-census reported that 70% of all start-ups did not have any further employees. Later on, similar differences were reported between the representative micro-census and the non-representative data KfW (2004, 2005).

  29. It is worth mentioning that start-ups usually pay lower wages to their employees than well-established firms. Nevertheless, these employees appear to be more satisfied, cf., Winter-Ebmer and Zweimüller (1999) for Swiss and Brixy et al. (2007) for German data.

  30. The last observation corresponds, to a certain extent, to the findings of a long-term analysis conducted by Fritsch and Weyh (2006) over 18 years. They conclude (see Fritsch and Weyh 2006, p. 256) that “newly established businesses tend to start with growing employment, but after 1 or 2 years employment tends to be stagnant, or to decline.”

  31. It should also be highlighted that the relative increase in income is higher for male participants in SUS compared to male participants in BA.

  32. Interestingly, there has not been much research on this question; the existing research shows that there are mixed findings with respect to the comparison of the income generated by self-employed persons in relation to the income of wage earners with similar characteristics. Hamilton (2000) showed that entrepreneurs “have both lower initial earnings and lower earnings growth than in paid employment.” In contrast to this, Rosen and Willen (2002) and Fairlie (2005) find that entrepreneurs have higher mean and median income levels than employed persons.

  33. To be more specific, 19.1% report that the income had declined in 2004 and 2005, 21.0% report a decline in 2004 and a constant level in 2005, and 4.8% report to have earned the same in 2004 as in 2003, but less in 2005.

  34. Moreover, a considerable portion of persons who terminated their self-employment activities were able to return to regular employment.

  35. Other related matchings in this research area, which are, however, not apt to answer this particular question, were done by Pfeiffer and Reize (2000), who compared start-ups by unemployed persons with other start-ups, and by Baumgartner and Caliendo (2008), who compared start-ups by unemployed persons with a control group of other unemployed persons who were looking for other employment opportunities.

  36. In fact, nearly 50% of the individuals using a BA reported that they would have started their business in any case, around 28% would have started on a smaller scale, and only 23% would not have started at all. For the SUS, for both men and women the answers are about equally divided among the three questions. Hence, possible deadweight losses seem to be smaller here.

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Acknowledgments

The authors thank Arne Uhlendorff and the Seminar participants in Berlin, Cologne and Leipzig for valuable comments.

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  1. Institute for the Study of Labor (IZA), P.O. Box 7240, 53072, Bonn, Germany

    Marco Caliendo

  2. Department of Innovation, Manufacturing, Service, German Institute for Economic Research (DIW), Berlin, Germany

    Alexander S. Kritikos

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  1. Marco Caliendo
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  2. Alexander S. Kritikos
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Correspondence to Marco Caliendo.

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Caliendo, M., Kritikos, A.S. Start-ups by the unemployed: characteristics, survival and direct employment effects. Small Bus Econ 35, 71–92 (2010). https://doi.org/10.1007/s11187-009-9208-4

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