Reducing Start‐up Costs for New Firms: The Double Dividend on the Labor Market*

Abstract

AbstractStarting a firm with expansive potential is an option for educated and high‐skilled workers. If there are labor market frictions, this additional option can be seen as reducing the chances of ending up in a low‐wage job and hence as increasing the incentives for education. In a matching model, we show that reducing the start‐up costs for new firms results in higher take‐up rates of education. It also gives rise—through a thick‐market externality—to higher rates of job creation for high‐skilled labor as well as average match productivity. We provide empirical evidence to support our argument.