What makes entrepreneurship counter-cyclical? Evidence from a shutdown of start-up subsidies in Denmark

Abstract

ABSTRACT This paper examines how the presence of startup subsidies to the unemployed influences the relationship between business cycle and entrepreneurial activity, and the implications on individuals’ long-term earnings. We propose that on one hand, this measure fosters entrepreneurship, especially during recessions, by attracting individuals facing labour market constraints. On the other hand, the policy may unintentionally penalize counter-cyclical founders back to paid jobs if employers perceive them as less committed or of lower quality. Exploiting a change in Danish policy that abolishes a startup subsidy scheme for the unemployed, we compare the entrepreneurial population in two extended periods. Our findings indicate that entrepreneurship tends to be counter-cyclical during the subsidy period (1988–1996), while pro-cyclical in the post-reform period (1998–2006). Moreover, the results highlight an unintended consequence of the policy, i.e. a persistent and large (post-exit) wage gap between counter-cyclical and pro-cyclical founders, particularly pronounced for individuals with lower education, unobserved ability, and part-time job experience prior to transition.