By Sarah Steimer
A period of unemployment may seem like the perfect time to experiment with starting a new business — but unemployment insurance (UI) benefits may actually deter people from entrepreneurship.
According to a new study published in the Strategic Entrepreneurship Journal, higher UI benefits lower the likelihood that an unemployed person will become self-employed. It’s often because most states require business profits to be deducted from unemployment benefits, which only accentuates the disincentive effect. Plus, higher benefits usually discourage people from transitioning out of unemployment.
Study author Wenjian Xu, an assistant professor in finance at Shanghai Jiao Tong University, was inspired to dig into the relationship between UI benefits and self-employment after his own parents lost their jobs and started a small business.
“When I entered the PhD program at the University of Michigan, I learned that the unemployment insurance system is a crucial public policy that shapes many unemployed people’s behaviors, which motivated me to link this policy to the decision of the unemployed to start a new business,” Xu says. “The high ratio of new entrepreneurs coming from unemployed people during the recent COVID-19 pandemic also makes it feel urgent to dig deep into this issue.”
Policymakers do have an opportunity to encourage more would-be entrepreneurs who are unemployed by creating self-employment assistance programs. Such initiatives allow unemployed people to start businesses without any profit deduction — and they waive the job search requirement.
“My paper’s main findings suggest that the disincentive effects of UI benefits mainly come from the profit deduction requirement,” Xu says. “Hence, removing this requirement from the UI system would mitigate the negative effects and encourage more unemployed entrepreneurs to experiment and explore their potential, fostering a vibrant local economic environment.”
Xu, W. (2021). Social insurance and entrepreneurship: The effect of unemployment benefits on new-business formation. Strategic Entrepreneurship Journal. https://doi.org/10.1002/sej.1419.
Sarah Steimer is a Chicago-based writer and editor with experience in magazines, newspapers and multimedia projects. She has covered subject matter that spans local news, marketing, medicine, food and more.