Modernize Unemployment Insurance systems so you can keep benefits while launching a new business start-up

The rate of new business start-ups is in a long decline in the United States, raising concerns about this crucial source of job creation, innovation, and economic growth. There’s a myriad of factors driving the trend, but underlying them is a basic reality facing most aspiring entrepreneurs: starting a new small business is risky, especially for those without sizable savings or separate income to tide them over in the beginning.

In the United States, trying to end unemployment by becoming one’s own boss also usually requires giving up Unemployment Insurance benefits—a financial tradeoff that’s simply untenable for many Americans.

Easing that tradeoff is the key to one promising solution to boost entrepreneurship and help Americans help themselves back into the workforce: expand Unemployment Insurance systems to maintain benefits to new start-up founders, rather than forcing them out once they decide to make the leap.

That’s the idea proposed in a new report on the Unemployment Insurance system, authored by several leading think tanks:

First, we recommend dramatically increasing unemployed workers’ opportunity to become entrepreneurs through UI. While entrepreneurship will not be the best path for the vast majority of UI participants, supporting entrepreneurship among the minority of participants for whom business-creation is a strong option is valuable: Young, small businesses are an important source of new job creation in the United States, but the rate of new business formation has fallen by nearly half over the past three decades.

We recommend increasing entrepreneurship by expanding access to Self-Employment Assistance, or SEA, programs. These programs assist UI claimants in starting small businesses by providing entrepreneurship training and other resources and by waiving UI’s typical work search requirements to allow participants to build their businesses on a full-time basis. In 2015, six states had active SEA programs. We recommend every state be required to create and maintain a SEA program as a condition of receiving the full Federal Unemployment Tax Act, or FUTA, tax credit.

Federal policymakers should provide one-time funds to initiate these programs in states where they do not already exist and to enhance operations in states with previously established programs. …

To further foster UI as a channel to entrepreneurship, jobless workers should be allowed to consider participating in SEA from the beginning of their unemployment spell, rather than requiring that the worker profiling system identify potential participants among those who are likely to exhaust UI benefits. Finally, SEA participants should be given the option to claim up to half of their remaining unemployment compensation as an upfront payment to finance the start of their business—following the example of France, which introduced such an initiative in 2007.

Would it work? What about the rate at which new businesses fail? It should be noted that a foundation for updating America’s workforce and social insurance systems this way already exists—the state-level Self-Employment Assistance programs. Also, France has already experimented with a similar program with promising results, as explained by the Harvard Business Review:

Unemployment insurance had been a substantial deterrent to entrepreneurship in France, because individuals without jobs ceased to be eligible for it if they founded a business. So the French Ministry of Labor enacted a series of reforms which allowed founders to continue to draw unemployment benefits during the first three years of their business, subject to some restrictions, and to remain eligible for such benefits if the business subsequently failed.

The reforms appeared to have an almost immediate effect: the rate of new firms created rose by 25%. But researchers at MIT, Berkeley, and HEC Paris set out to determine whether the increase was actually caused by the policy change. They wondered whether some of the change could have had to do with the state of the economy, or whether the quality of the new businesses was lower as a result. They found that at least a large part of the increase was directly a result of the policy, and that the new businesses seemed at least as productive and sustainable as older ones. Moreover, they estimate that the change boosted the nation’s economy by €350 million per year, at a cost of only €100 million annually.

They used the same approach to measure the quality of the businesses. Start-ups founded after the reforms in industries with more small firms — the ones more likely to have been the direct result of the reforms — were just as likely to stay in business, to grow, and to hire as those in industries with more large firms. The entrepreneurs were equally as well-educated in both groups as well. Perhaps most importantly, the new firms were more productive and paid higher wages than the average incumbent.

For more information, see “Strengthening Unemployment Protections in America,” Center for American Progress, Georgetown Center on Poverty and Inequality, and National Employment Law Project (2016); “How France Used Unemployment Benefits to Kickstart Entrepreneurship,” Harvard Business Review (2015); and “Can Social Insurance Unlock Entrepreneurial Opportunities?” Kauffman Foundation (2016).