Welfare and entrepreneurialism. Some might think those two concepts stand at the opposite ends of the political spectrum, one symbolises capitalism red in tooth and claw the other feels all nice, soft and cuddly. If you have ever experienced both, then actually your perception may be quite different – if anything the opposite, living off welfare can be nasty, and you are reliant on people and rules that are not always so sympathetic, whereas entrepreneurs put emphasis on collaboration, while money is far from their only motivation.
But maybe the truth is that welfare and entrepreneurialism have more of a symbiotic relationship. Clearly any form of welfare state needs business success so that tax revenue can cover costs. So entrepreneurs may be essential for that. But a new paper, suggests that it works both ways, that people are more likely to set-up a business if there is some kind of social safety net. The paper’s conclusion is supported by previous work. By the way, there are implications here for China, and what a so called communist state could do to enact more socialist type principles in order to support capitalism. More of that in a moment.
The paper, produced by Joshua D. Gottlieb, Richard R. Townsend and Ting Xuone, takes a look at the Canadian system for providing job-protected leave to women who have had a baby. The maternity leave reform was introduced in the year 2000, and it enabled women to return to their jobs after having a baby for up to one year. But what if a similar idea was applied to a different form of giving birth. Suppose that if your new baby is your business, would you be more likely to have a go if you find that your previous job is still there after a year? This is what the paper found: “longer job-protected leave increases entrepreneurship by 1.8 percentage points.”
In other words, yes, it works. It turns out that it works especially well in industries where “experimentation is valuable.” There is a snag, maybe a fatal flaw with such an idea. Supposing your idea involves setting up in direct competition with your employer, then after a year it doesn’t work and you return to your previous employer – feels like a recipe for disaster, doesn’t it? Still, you can see why such an idea could work in certain cases.
Another study, this time produced by an assistant professor at Harvard, Garath Olds, finds that when eligibility for the US Supplemental Nutrition Assistance Program, or food stamps, was extended, there was a rise in the formation of new companies. In fact, he found that in some states the chances of a household owning a business increased by 16%.
Another study http://equitablegrowth.org/equitablog/entrepreneurship-side-risks-social-insurance/ focusing on France, the country which according to George Dubya Bush doesn’t have a word for ‘entrepreneur’, showed the French unemployment insurance system led to a 25% increase in the formation of new firms when the benefits were extended to unemployed workers who start a business.
None of this will surely come as much of a surprise to entrepreneurs themselves – while the perception amongst a large part of the public might be that entrepreneurs are rich, and should be taxed heavily, the reality is that they are taking huge risks, which does not always come off.
Mind you, there may also be a link between entrepreneurialism and hardship, because, as they say, necessity is the mother of invention. If you ask an entrepreneur, who set up a Fintech in London, why they did it, quite often they may respond: “Well I lost my job after the banking crash of 2008 and it was either that or the dole queue.” Still, it would have been good if the government had a found a way to offer them both – unemployment money and the freedom to have a go at a business.
Oddly, In China, a so-called communist country, there is virtually no social safety net. If you are unemployed, you suffer. But the problem with China’s economy is not enough consumer spending – and there is a good reason for this, lack of a social safety net means households feel that they have to save as much as possible. Provide more of a net, and maybe Chinese savings will fall, and consumption will rise, and the economy can carry on growing without being so reliant on the rest of the world buying its goods.