Increasing the availability of unemployment benefits can be a controversial policy. Yet, few policymakers have studied how initiatives like this can affect entrepreneurs in their countries.
A recent study evaluating the impact of French legislation that provided aspiring entrepreneurs with unemployment insurance found that the program led entrepreneurial activity to increase through the creation of new companies, but total job growth remained the same since job growth at existing firms slowed down during the same period.
In 2002, French policymakers passed legislation to protect aspiring entrepreneurs from financial insecurity. Ten years in, a group of researchers evaluated the results of the reform, called PARE “Plan d’Aide au Retour a l’Emploi’ (‘Plan to Assist the Return to Employment’)”, which allowed entrepreneurs to retain their right to unemployment benefits for three years after the bankruptcy of their businesses. Additionally, it allowed startup founders to fill the gap between their income as an entrepreneur and the unemployment benefits they were eligible for.
The study indicates that other policymakers can benefit from five lessons within the French experience:
1. As intended, many new firms were created in response to the reform: the industries studied by the authors grew by approximately 1,000 new businesses per month for seven years after it was introduced.
2. Most new firms were zero-employee firms. Seeing as it was aimed at unemployed workers with little initial capital, this is hardly surprising.
3. Even though few of the startups had any employees initially, they did create a significant amount of jobs in the long run. Not only that, but the new founders were found to be more ambitious than their incumbent peers in terms of hiring plans, disproving expectations that unemployment insurance may worsen the pool of startup founders.
4. The startups created in response to the reform were just as likely to survive and exit as their incumbent peers. They may have been small at the beginning, but they did not have a lower potential for job creation.
5. There was one catch: looking at the total impact on job creation, the authors found that jobs at the new firms crowded out new hires at small incumbent firms. As the new firms hired more, the old ones hired less. Overall, employment gains at new firms were roughly equal to the decline in hiring at the old ones.
The original study “Can Unemployment Insurance Spur Entrepreneurial Activity? Evidence from France” is available here.