Characteristics and Determinants of Start-ups from Unemployment: Evidence from German Micro Data

Abstract

The study empirically analyzes the characteristics and determinants of start-ups from unemployment in Germany. Individual unemployment is shown to be an important push-factor for the transition to selfemployment. The selection of the higher-educated into self-employment is stronger among the unemployed than among the employed. The educational level of formerly unemployed founders is comparable to those of other founders. Start-ups from unemployment have fewer employees on average and are mostly one-man firms. A large proportion of them are in less capital-intensive sectors characterized by a high level of competition. The smaller propensity of previously unemployed founders to invest and to take on employees can be attributed to their restricted access to finance and information on opportunities. Subsidising start-ups from unemployment with loans instead of grants and helping the unemployed to improve their abilities in opportunity recognition should enhance the quality of start-ups from unemployment.RéSUMé. Cette étude analyse empiriquement les caractéristiques de jeunes entreprises créées par des gens sans emploi en Allemagne ainsi que les déterminants de leur création. Le fait de se retrouver sans emploi est identifié comme un facteur important qui pousse les gens à la faire la transition vers le travail indépendant. Parmi les individus ayant un plus haut niveau d'éducation, le choix du travail indépendant est plus prévalent chez ceux qui sont au chômage que chez ceux qui ont un emploi. Le niveau d'éducation des gens qui étaient sans emploi et qui ont créé leur entreprise est comparable à celui des autres fondateurs d'entreprises. Les jeunes entreprises créées par des gens sans emploi ont en moyenne moins d'employés et sont surtout des entreprises personnelles. Une forte proportion de ces entreprises se trouvent dans des secteurs moins capitalistiques, marqués par une forte concurrence. Le fait que les fondateurs qui étaient au préalable sans emploi ont une plus faible propension à investir dans leur entreprise et à engager d'autres individus peut être expliqué par leur accès restreint à du financement et à l'information à l'égard des opportunités disponibles. Afin d'améliorer la qualité des jeunes entreprises fondées par des gens au chômage, il serait préférable de leur offrir un financement sous la forme de prêts au lieu de subventions et aussi d'améliorer leur habileté à reconnaître des opportunités d'affaires.

Regional unemployment structure and new firm formation

“…By contrast, the findings of this study suggest a considerably more nuanced policy approach that takes the heterogeneity of the unemployed into account. If it is true that highly‐qualified unemployed form a particularly promising reservoir for new venture creation in knowledge‐intensive industries as the results of this study suggest, then entrepreneurship training courses and financial support focusing on this particular clientele might be a good investment (see Niefert and Hinz and Jungbauer‐Gans for similar proposals). Moreover, our results suggest that it might be important to address unemployed people relatively early in their unemployment spell in order to avoid a significant depreciation of human capital, as the long‐term unemployed hardly find their way, either into wage‐employment or entrepreneurship.…”

Subsidized start-ups out of unemployment: a comparison to regular business start-ups

“…For Germany, existing studies deliver no clear answer on whether subsidized businesses are comparable to regular businesses in terms of business performance (Hinz and Jungbauer-Gans, 1999;Pfeiffer and Reize, 2000). Furthermore, Niefert (2010) finds no shortages in terms of educational attainment but does find credit constraints for start-ups out of unemployment. However, the validity of the results is restricted due to data limitations, i.e., regional representativeness, the limited scope of available characteristics and cross-sectional information preventing an in-depth analysis of business development.…”

“…Moreover, the lack of employment experience also induces disadvantages in terms of business and social networks, i.e. contact to potential customers, business partners or knowledge spillovers from colleagues (Niefert, 2010). Third, due to imperfect information unemployed individuals primarily focus on dependent employment and tend to ignore self-employment (Storey, 2003, refers to it as "lack-of-awareness").…”

“…This is usually undertaken at short notice, with less time invested in preparing the start-up, e.g. elaborating the business idea or marketing and financial strategy (Niefert, 2010). In this context, Shane (2003) argues that unemployed individuals have less access to information concerning business opportunities and lower opportunity costs, and consequently they also realize less valuable business ideas, introduce less innovation and hence earn smaller profits.…”

Personality traits and the evaluation of start-up subsidies

“…Such disadvantages might arise because of more severe credit constraints due to lower financial means or discrimination by credit markets (see Meager, 1996;Perry, 2006), a depreciation of their start-up specific human and social capital during unemployment (Pfeiffer and Reize, 2000;Niefert, 2010), a strong focus on dependent employment during job search resulting from imperfect information (Storey, 2003, refers to it as "lack-of-awareness") and finally a higher share of necessity start-ups due to missing employment alternatives. Caliendo et al (2015c) provide descriptive evidence for the existence of such disadvantages by comparing subsidised start-ups (considering the same programme as under scrutiny here) with regular start-ups in Germany.…”