Unemployment benefits, entrepreneurship policies, and new business creation

Plain English SummaryGenerous unemployment payments can either "make or break you"! In simple words, while social benefits may contribute to income support and poverty prevention among the unemployed, these can also harm the economy by breaking one of its most important engines: entrepreneurship. By focusing on 23 EU countries, the paper highlights a negative impact of unemployment compensations on overall but also opportunity entrepreneurs, while the effects on necessity entrepreneurs are inconclusive. New business creation is inhibited when unemployment benefit systems offer generous compensations, especially at the beginning of the unemployment spell. At long unemployment durations, high-quality policies and programmes for entrepreneurs efficiently act towards diminishing such side effects. Our findings suggest that, when choosing the design features of social security systems, policymakers should definitely consider their adverse impact on entrepreneurship. Even when unemployment benefits are large, their side effects could be limited by compensatory measures, such as stricter job-search requirements or allowing unemployed individuals to keep receiving compensation while in the process of creating a new business. Besides their common link with unemployment, unemployment benefits are also relevant to the decision to become an entrepreneur. We thoroughly explored this relationship for a panel of 23 EU countries over the period 2001-2019. Our results demonstrate that generous unemployment compensations hinder entrepreneurial initiative, and those opportunity entrepreneurs, who are more likely to create new jobs and innovation, are affected more. Contrary to common belief, we find an unequal pattern of effects, with higher benefits being more detrimental at the beginning of the unemployment spell. A favourable policy framework results in being relevant for entrepreneurial endeavours on its own; in addition, high-quality policies and programmes for entrepreneurs are found to temper the negative effects of large unemployment benefits on new business creation during long unemployment spells. Our results support the call for properly designed unemployment benefit systems (as both level and time pattern) that ensure an optimum balance between adequate income replacement and poverty prevention, on the one hand, and limited side effects on new venture creation, on the other hand.