OECD said that the jobs crisis activated by the COVID-19 pandemic is one of the worst since the Great Depression. This urges governments to roll out Active Labor Market Policies (ALMPs) to hinder the looming danger of unemployment for years to come.
ALMPs intervene in the labor market to help people find work or get jobs quicker. It could be mainly grouped into four big policy groups – vocational training, job search assistance, wage subsidies, or public works programs, and self-employment incentives (Levy Yeyati et al., 2019). These measures are especially effective in the time of volatile job market caused by changes in technology, demographics, or social and business practices (as in globalization).
As COVID-19 has prolonged and accelerated the adaptation of frontier technologies and social practices from offline to online (Deloitte., 2020), considering ALMPs is crucial for policymakers to protect their countries' workforces from inefficiency and resurge the economy.
Startup subsidies during recessions
During recessions, academics and policymakers have been discussing the impact of policies not only on the demand side (i.e., fiscal and monetary policies) but also on the supply side with the focus on entrepreneurship to leverage microeconomic reforms (Roman, 2010).
Edmund Phelps, the 2006 Nobel Prize laureate, noted in his letter to report to the G20 on the Conference "Post-Crisis Economic Policies" (Berlin, December 2009) that: "The policy responses to the current crisis have focused on the "demand-side" through fiscal stimuli, liquidity support to banks and very low central bank interest rates. […] the challenge in the post-crisis era can be primarily found on the supply side." (Phelps, 2010).
To be more specific, when the financial crisis hit in 2009 and gradually turned into the job crisis with the substantially increasing unemployment rates, many countries have decided to roll out active labor market policies to get people to escape unemployment. The measures adopted by OECD countries were tools tapping at both demand and supply sides, such as wage subsidies, job-search assistance, retraining or on-the-job training, and job creation schemes (Caliendo et al., 2010). However, the ineffectiveness of these traditional ALMPs was proven in the research results of Stephan (2008) and Stephan and Pahnke (2008), Lechner and Wunsch (2008), Card, Kluve, and Weber (2009).
Therefore, some governments have considered exploiting startup subsidy programs, which provide financial assistance for the unemployed to start new businesses (Román et al., 2010).
In fact, a higher possibility of starting a new business among unemployed individuals has been proven in a number of empirical studies (Román et al., 2010). The prospect of losing a job for a long time pushes a person to take a risk and utilize their strength and potential, which might be constrained during the time they have a regular job and a stable earning (Xu, 2018). A person who is displaced by corporate bankruptcy are also more likely to be self-employed (Hacamo and Kleiner, 2016).
In the long run, these schemes are expected to improve participants' employment perspectives as self-employment increases their competency, networks, and work experience to find better regular jobs in the future (Caliendo et al.,2010). By way of example, startup subsidy recipients in Germany have a 14.5–22 percentage point higher probability of being re-employed after 4.5 years than unemployed workers who did not start a business (Caliendo et al., 2016).
Moreover, even with a little share in total employment, the contribution of young firms to job creation is proportionally higher, as per data collected from the OECD during the 2001- 2011 period. Firms five years old or younger comprised only 17% of total employment on average but accounted for 47% of job creation. This pattern appeared similarly in various countries' statistics, which highlighted young firms as net job creators.
Source: OECD DynEmp
From a macroeconomic perspective, the rising competition in the market created by the entry of new firms (as the result of startup subsidies) could leverage the productivity of the whole country, promote technology innovation and diffusion, and then contribute substantially to the stability and growth of the economy (Storey, 1994; Fritsch, 2008).
How are these programs designed?
Startup subsidies are various in size, term, and qualification criteria among countries.
Gründungszuschuss (new startup-subsidy) program has been implemented in Germany since 2006, replacing two other previous schemes called "bridging allowance" ("Überbrückungsgeld") and "startup subsidy" ("Existenzgründungszuschuss"). This strategy is considered one of the most important ALMP of the German government (Caliendo et al., 2012), which granted some 120,000-250,000 participants per year from 2002 to 2011. Having been qualified for unemployment insurance benefits for at least 150 days and received approval from the chamber of commerce on the business plan, one can receive an average grant of €1,250 a month or €7,500 for the first six months.
In the U.K., founders can apply for not only a six-month allowance of about €1,450 but also a loan of up to €1,150 to start their businesses. The local mentoring organizations are important agents of this policy as it is assigned to qualify and develop the business ideas of participants. Similarly, the U.S. also provides startup training programs for selected participants with low probabilities of rejoining the workforce, in addition to the unemployment benefit payments for up to six months.
Swedish and French programs are even more open. It is available for any registered unemployed workers who decide to start their own businesses, with the amount of payment based on the unemployment benefits.
Finland is more generous with a subsidy of €590 a month for up to three six-month periods of a startup. However, the criteria are stricter with consideration to the previous self-employment experience or the participation in some training programs of the applicants.
However, it is noted that various concerns related to those programs need to be addressed, including the low-ability entrepreneurs (the subsidized founders are unqualified for doing businesses), deadweight effects (the subsidized person can startup even without grant), moral hazard (reducing efforts of individuals as a result of subsidy receiving), and crowd-out effect (newly formed subsidized businesses may displace non-subsidized firms) (Caliendo, 2016).
But not all startup businesses can create massive jobs
While participants in startup subsidy programs could get away from unemployment and improve their re-employment probability compared with other unemployed workers, Caliendo (2015) pointed out that the subsidized businesses have lower income, slower growth, and less innovation than regular startups. His study for France's program even finds no significant effect on turnover or employment growth rates.
This can be explained by the fact that although entrepreneurship is considered the driver of job creation, the contribution involves rich dynamics regarding the type of startups and the founders' motivations and ambitions.
An empirical study of Roman et al. (2010) confirmed the heterogeneous characteristics of self-employers, which could be defined as innovative against imitative entrepreneurs, productive, unproductive, and destructive entrepreneurs, or opportunity against necessity entrepreneurs. As a result, he suggested that some startup subsidy programs without consideration to the heterogeneity of participant groups could benefit some businesses while spoiling others.
In fact, the "double dividend" of radical innovation and massive job creation is rather elicited from high-growth businesses. These high-growth firms can compensate for virtually all the job losses related to contracting and bankrupt companies within their cohort (Decker et al., 2014). Therefore, each entering cohort of startups is supposed to contribute to net job creation in the long term.
Haltiwanger et al. (2017) documented that the small group of young high-growth firms, or 'gazelles,' with exceptional growth potential, accounts for about 40% of aggregate growth in total factor productivity, 50% of aggregate output growth, and 60% of aggregate employment growth.
In the U.S., almost 50% of gross job creation is elicited from high-growth businesses, while about 20% of U.S. total new jobs are made from business startups (for summaries, see research results of Haltiwanger, Jarmin, and Miranda (2013) and Haltiwanger (2012)). Similarly, from 2015 to 2016, the U.K.'s Centre for Economics and Business Research found high growth small businesses contributed to one in every five new jobs in the U.K. and more than 20% of economic growth. These 22,074 companies, accounting for less than 1% of U.K. business, generated on average more than 3,000 new jobs each week.
Moreover, as the startup boom is closely related to the technology advancements, technology-based jobs have been proven to yield a larger multiplier effect than jobs in any other sector, such as extractive industries or traditional manufacturing. Enrico Moretti, Professor of Economics at the University of California, found that five extra jobs in other sectors are created for each new technology-based job. The region where a number of technology firms are located is also more attractive to other knowledge-intensive companies and workers.
By way of example, 53,000 jobs for Facebook app developers and 130,000 jobs in derivative business services have been created indirectly from only a few thousand workers officially hired at Facebook's Menlo Park headquarters in 2012 (Deloitte U.K., 2015). Similarly, 80,000 direct employees of Apple in the U.S. constitute just 4% of the total number of US-based jobs the firm has offered. Apple's US-based suppliers generated 450,000 jobs, and the app store ecosystem made more than 1.5m jobs available.
The News Feed team at Facebook headquarters in Menlo Park California.
Accordingly, the U.K. government has increasingly carried out policy approaches to support a relatively small number of companies with the highest growth potential, rather than broad support programs for new businesses and SMEs (StartupAUS, 2019).
Those studies led to a need for governments to carefully design startup subsidy programs to achieve their goal of alleviating long-term unemployment, without wasting the limited resources.
Startups in the job market during Covid-19 and policy implications
Most startups face significant challenges during COVID-19 as they are more financially fragile, have a vulnerable labor supply, and manage unstable market relationships, especially those with a high-growth target in relation to high-risk new business models (Calvino et al., 2020).
However, although the number of new business registrations mostly decreased during recessions, many successful innovative startups still arose from periods of crisis. Dropbox, Uber, Airbnb, WhatsApp, Groupon, and Pinterest were all established during or just after the global financial crisis. Alibaba's Taobao was also founded during the SARS outbreak in China in 2003 (Calvino, 2020). This proves that periods of crisis give way to new opportunities for entrepreneurs.
During COVID-19, telemedicine, food delivery, online learning, remote work, or gaming startups also thrive amid the quarantines (Sedláček, 2020). For example, shares of Zoom, a company that provides a cloud-based peer-to-peer software platform for teleconferencing, telecommuting, distance education, and social relations, have surged almost four-fold this year.
Zoom employees have used Zoom for distant working during the pandemic. Photo by Zoom blog.
Not only can startups help tackle the challenges posed by health issues or economic conditions, but they also adapt to changing customers' needs and behaviors more efficiently. As a result, massive new jobs can be created as quickly as these startups thrive or new startups enter the market.
Therefore, rolling out carefully designed startup subsidy programs can be considered a strategy for governments to foster the ability of startups to grasp new business opportunities. Last December, the Delhi government announced that they are working on a startup policy to help students start their own companies with their deas. Officials said that they would provide both legal and technical guidance, as well as aid students in getting loans.
To successfully carry out these plans in the course of the COVID-19 pandemic, I endorse several recommendations for policymakers as follows.
First, a startup subsidy program as an ALMP should take into account the specificities of startups with respect to other SMEs (OECD 2020b) and accompany it with specific policies for flexible funding. For example, apart from startup subsidies, France has set up a €4 billion fund to support startup liquidity, including bridging startup funding rounds; Germany has announced a tailored startup aid program, expanding and facilitating venture capital financing; and the U.K. has announced a co-financing fund for innovative companies facing financial difficulties (OECD 2020a).
Second, policymakers can consider assisting the subsidy programs with training or mentoring courses to raise awareness of the new business opportunities or technology that could thrive after the crisis. Industries that appear more resilient to COVID-19 and recorded with higher post-entry employment growth could be the main anchors. For example, as per the OECD DynEmp3 database, digital intensive sectors contribute disproportionately to job creation.
Third, the subsidy program can set up a special prioritizing process or fast-track funding for startups that address the pandemic's short-term challenges, which could turn into permanent issues later. For example, innovations in telemedicine, remote personal care, medical equipment, home delivery, food processing, teleworking, online education, contact tracing are of particular and urgent need.
Forth, startup subsidy programs should include the involvement of incubators and accelerators and a plan to improve the connections within the whole startup ecosystem. Not only does it boost the entrepreneurial potential for long term growth, but it also helps reallocate the job seekers into startup sectors that need employees for their exponential growth target.
References
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