Why start-up subsidies even help in labor market slumps

Subsidizing unemployed workers to start their own business has been proven an effective policy tool to improve long-term employment and income prospects of unemployed. One open question is whether these labor market programs also work in regions with bad labor market conditions: on the one hand, subsidies might be highly effective given few vacancies; on the other hand, adverse labor market conditions might jeopardize the long-term economic success of the start-up. A new IZA discussion paper by Marco Caliendo and Steffen Künn investigates this trade-off using data on participants in German start-up subsidy programs. The authors show that even in regions with bad labor market conditions unemployed individuals in start-up programs do – mostly – better than people in privileged labor markets. This effect is mainly driven by the bad labor market prospects of the non-participants, rather than by differences in firm performance of the newly founded enterprise under different circumstances. The authors conclude that policy makers should continue to provide start-up subsidies to unemployed individuals in the future — especially in regions with unfavorable labor market conditions.