Unemployment benefit duration and startup success

Sebastian Camarero Garcia and Martin Murmann

No 31/2024, Discussion Papers from Deutsche Bundesbank

Abstract: Business creation is economically important, and unemployment precedes the creation of a substantial share of new firms. Yet, most research has focused on analyzing the effects of unemployment insurance policies on re-employment outcomes, ignoring self-employment. In this paper, we analyze how the potential duration of unemployment benefits, a fundamental design choice of unemployment insurance systems, affects whether new firms are founded out of opportunity or necessity and their growth potential. To this end, we construct a comprehensive dataset on German firm founders that links administrative social insurance information with business survey data. Exploiting reform and age-related exogenous variation in the potential duration of unemployment benefits, we find that longer potential benefit duration implies longer actual unemployment and, as a consequence, more necessity entrepreneurship and worse startup outcomes in terms of sales and employment growth. We explain this overall effect of potential benefit duration through a mix of compositional and individual-level duration effects. Our findings underline that new firms started out of unemployment are a highly heterogeneous group and suggest that the (optimal) design of unemployment insurance systems has important externalities on whether innovation- and growth-oriented firms are started out of unemployment.

Keywords: entrepreneurship; unemployment insurance; self-employment; opportunity entrepreneurship; fiscal externality (search for similar items in EconPapers)
JEL-codes: D22 J21 J23 J44 J62 J64 J65 L11 L25 L26 M13 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-bec, nep-ent, nep-lab and nep-sbm
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:301863

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