Entrepreneurship Among the Unemployed: The Effects of Unemployment Benefits

Abstract

This paper studies the impacts of social insurance on the decisions of unemployed individuals to start businesses. Exploiting staggered changes in benefit generosity across U.S. states and over time, I find that higher unemployment insurance (UI) benefits both lower the probability that an unemployed person will become self-employed and extend the length of time before they make such a transition. The negative effects of UI benefits are concentrated on the formation of unincorporated businesses. Unincorporated businesses created by unemployed people in higher benefit state-periods tend to be more successful, as measured by profit and survival rate, suggesting that higher benefits mainly screen out the entry of less productive firms. The negative effects are smaller during non-recession periods and in states that offer the Self-Employment Assistance program.