Research Shows Negative Effects of Generous Unemployment Insurance Benefits

According to a new study published in the Journal of strategic entrepreneurship.

Author Wenjian Xu, an assistant professor of finance at Shanghai Jiao Tong University, used US Department of Labor information on each state’s maximum weekly unemployment insurance benefits and surveyed state labor departments. States to understand policy details on how starting a new business would affect unemployment insurance. eligibility.

Research has also shown that the negative effects of unemployment insurance benefits -; particularly generous benefits -; focus on the formation of unincorporated businesses. “This result is a bit surprising at first glance, as we would have thought that higher unemployment benefits might provide support for people trying to start their own business, leading to more new businesses,” Xu said. However, most states require business profits to be deducted from unemployment benefits, which discourages the creation of new businesses. Also, he says, higher benefits generally discourage people from getting out of unemployment.

Yet the study found that unincorporated businesses started by unemployed workers in periods of higher benefits tend to be more successful, as measured by profit and survival rates. This suggests that higher benefits act as a filtering device that discourages the creation of lower quality firms.

The negative effects identified by Xu in his study were particularly high during periods of recession, because that is when entrepreneurs are pessimistic about future profits. “Since the deterrent effect resulting from the profit deduction requirement is mainly concentrated on companies with lower profits, the effect will be greater when there are more companies expecting to make lower profits,” he says. In fact, Xu’s empirical results found that the negative effect of unemployment insurance benefits on the transition from unemployment to entrepreneurship during recessions is three times greater than during non-recession periods.

From a policy perspective, the research shows that removing the profit deduction requirement from the unemployment insurance system would mitigate the negative effects and encourage more unemployed entrepreneurs to experiment and explore business creation. business, which Xu says could foster a vibrant local economic environment. Self-Employment Assistance (SEA) programs aim to achieve this goal, as they allow the unemployed to start a business without any profit deductions and they waive the job search requirement.

In 2016, only eight states had the program, Xu found, and the percentage of unemployed people joining the program in those states was low due to the restrictive conditions. To further foster entrepreneurship and create jobs, Xu’s study suggests that policymakers embrace the SEA program and loosen conditions to cover more unemployed workers -; especially during recessions, when the deterrent effect of unemployment insurance benefits is greater on potential entrepreneurs and when it is more difficult to find a new job.

During the COVID-19 pandemic, the share of new entrepreneurs who were initially unemployed reached the highest level (30%) recorded in 25 years. Therefore, it becomes urgent and important for policy makers to remove barriers and facilitate such a transition.”

Wenjian Xu, Assistant Professor of Finance, Shanghai Jiao Tong University


Journal reference:

Xu, W., (2022) Social Insurance and Entrepreneurship: The Effect of Unemployment Benefits on New Business Creation. Journal of strategic entrepreneurship.