Starting a business after unemployment: characteristics and chances of success (empirical evidence from a regional German labour market)

Labour market policy in Germany strongly supports initiatives to found new businesses. In addition to credit programmes with low interest rates open to everyone, the state also supports the foundation of businesses by the unemployed. Business founders who are entitled to receive unemployment compensation get temporary financial assistance to start up a business on their own. In this paper, the authors evaluate how this policy instrument works. The analysis is based on data taken from a mail survey with business founders who started their businesses in 1995 in the metropolitan area of Munich. The results show that it is hard to define whether the programme supports additional business foundations. However, the authors have some empirical evidence that this might be the case. In addition, the analysis did not reveal a deficit in human capital among the unemployed founders. However, a deficit in financial resources was detected. Unemployed founders have to negotiate higher hurdles if they want to raise outside capital. The businesses founded by the unemployed founders are on average as competitive as those founded by employed founders; however, they show a slower pace of employment growth. Furthermore, the authors demonstrate that the unemployed founders are a highly selective sample of all the unemployed, especially if one focuses on human capital resources. As a consequence, the effects of the programme should be interpreted conservatively.