Start-up subsidies for the unemployed: Long-term evidence and effect heterogeneity

Turning unemployment into self-employment has become an increasingly important part of active labor market policies (ALMP) in many OECD countries. Germany is a good example where the spending on start-up subsidies for the unemployed accounted for nearly 17% of the total spending on ALMP in 2004. In contrast to other programs like vocational training, job creation schemes, or wage subsidies the empirical evidence on the effectiveness of such schemes is still scarce; especially regarding long-term effects and effect heterogeneity. This paper aims to close this gap. We use administrative and survey data from a large sample of participants in two distinct start-up programs and a control group of unemployed individuals. We find that over 80% of participants are integrated in the labor market and have relatively high labor income five years after start-up. Additionally, participants are much more satisfied with their current occupational situation compared to previous jobs. Based on propensity score matching methods we estimate the long-term effects of the programs against non-participation and take great care in assessing the sensitivity of our results with respect to deviations from the identifying assumption. Our results turn out to be robust and show that both programs are effective with respect to income and employment outcomes in the long-run, i.e., five years after start-up. Moreover, we consider effect heterogeneity with respect to several dimensions and show that start-up subsidies for the unemployed tend to be most effective for disadvantaged groups in the labor market.