Public subsidy for entrenprenurial business start-ups, Germany

About

Country: 
Germany
Target Groups: 
employers/purchasersworkers/suppliers

 

In 2002, the government introduced a new public subsidy for business start-ups established by unemployed people, coined as the ‘Ich-AG scheme’. The aim of the initiative was twofold: firstly, it aimed to lower the unemployment rate; at the same time, policymakers hoped to encourage unemployed persons engaging in undeclared work to return to the formal economy. Between 2003 and 2006, over 400,000 unemployed persons were granted funds under the Ich-AG scheme. Moreover, over 70% of these new entrepreneurs were still in the market 28 months after founding their business.

 

Background

In 2002, the commission on ‘Modern services in the labour market’, the so-called Hartz Commission, presented a reform proposal for national labour market policy. Among other things, the proposal recommended the restructuring of the Federal Employment Agency (Bundesagentur für Arbeit, BA) as well as the better use of its labour market instruments. As a result of the Hartz Commission’s reform proposals, a new public subsidy for business start-ups (Existenzgründungszuschuss) was introduced in 2003. New businesses benefiting from this subsidy became known as the Ich-AGs, or ‘Me PLCs’.

Unemployed persons receiving unemployment benefits or participants in a number of other specific schemes sponsored by the BA could apply for Ich-AG funds at their local employment agency.

Objectives

The introduction of the new public subsidy sought to reduce Germany’s unemployment rate. The 10th report (in German, 656Kb PDF) on the impact of the law combating illegal employment, issued by the federal government, highlights how the new premium also sought to target ‘unemployed persons known to be prone to undeclared work’. The Ich-AG scheme was set up to help such persons start their own business as lone entrepreneurs on a lawful basis, instead of working in the informal economy.

Specific measures

The Ich-AG scheme granted public subsidies to unemployed persons who sought to leave unemployment by setting up their own business. Funds could be provided for a maximum of three years. Lone entrepreneurs were granted a monthly allowance of €600 in the first year, €360 in the second year and €240 in the third year, provided that their income did not exceed €25,000 a year. As long as they were in receipt of Ich-AG funds, recipients were covered by the statutory old-age pension scheme and obtained access to the statutory health, accident and long-term care insurance schemes.

Evaluation and outcome

Achievement of objectives

An analysis (in German, 991Kb PDF) by the Institute for Employment Research (Institut für Arbeitsmarkt- und Berufsforschung, IAB) shows that approximately one million business start-ups were subsidised by the BA between 2003 and 2006. Of these, nearly 400,000 received financial support from the Ich-AG scheme. It should be noted that many of the lone entrepreneurs who started businesses with the help of Ich-AG funds were still in the market 28 months after their launch (see section on ‘Impact indicators’).

Obstacles and problems

The Ich-AG scheme was initially criticised for performing the same function as a second, already existing public measure called the ‘bridging money’ scheme (Überbrückungsgeld). Doubts were expressed that the introduction of the Ich-AG scheme would lead to an effective increase in the numbers of business start-ups by unemployed persons. The government therefore finally responded to public calls to optimise the structure of the public funds granted by the BA. On 1 August 2006, it fused the two labour market instruments into one, namely the ‘start-up premium’ (Gründungszuschuss). However, as recent research shows, the two labour market instruments attracted different applicants (see ‘Lessons learned’).

Lessons learnt

Recent research indicates that the Ich-AG scheme and the ‘bridging money’ scheme attracted different applicants. People applying for bridging money had generally obtained a higher education than Ich-AG recipients. On the other hand, female unemployed persons more often chose to apply for Ich-AG funds. In light of these findings, it should be noted that the merged body might not attract the same number of applicants as its two predecessors.

Impact indicators

The aforementioned IAB study presents the results of a survey covering about 6,000 people who had founded their own businesses. All of those surveyed had received either financial assistance from the Ich-AG scheme or grants of ‘bridging money’ in 2003. However, the survey was conducted for the first time in 2005. One year later, approximately 70% of the respondents were interviewed in a second round.

As Table 1 indicates, in western Germany 70.4% of the male participants on the Ich-AG programme and 74.6% of their female counterparts were still self-employed after 28 months. The figures for eastern Germany amounted to 80.9% and 74.2%, respectively.





Performance of Ich-AG recipients after business start-up, by sex and region

Status of former recipients

Western Germany

Eastern Germany

  Male recipients Female recipients Male recipients Female recipients
After 16 months: %

Self-employed

74.7

78.6

80.6

79.0

Unemployed or looking for work

14.6

8.3

13.9

11.0

In employment liable to social security contributions

7.3

5.4

3.1

4.1

Others

3.4

7.7

2.4

5.9

After 28 months:

Self-employed

70.4

74.6

80.9

74.2

Unemployed or looking for work

13.4

7.2

11.0

8.3

In employment liable to social security contributions

10.3

7.9

5.1

7.8

Others

5.9

10.3

3.0

9.7

Source: IAB Kurzbericht 10, ‘Business start-ups. On balance: a success’, 2007

Another positive finding was that Ich-AG recipients were less likely to become unemployed again: they either continued to be self-employed or returned to employment liable to social security contributions.

However, as shown in a study (in German, 741Kb PDF) by Caliendo and Steiner (2007), the financial expenditure for the Ich-AG programme was greater than the resultant savings. Nevertheless, compared with other BA measures, the programme costs can be considered moderate.

Transferability

The measure described was tailored for the German labour market and its public instruments. Therefore, the particular aspects of the German tax and social security systems must be taken into account before considering transferring the measure to other (European) countries.

Commentary

It should be noted that research on the impact of the Ich-AG scheme does not clearly indicate the extent to which undeclared work was actually reduced by the measure. Initial insights into its impact have been provided by a study by Baumgartner, Caliendo and Steiner (2006), who analysed the motives of Ich-AG or ‘bridging money’ recipients in founding their own businesses. While 84% of all persons surveyed stressed their wish to leave unemployment, about 60% of them stated that they had already acquired their first customers beforehand – a figure which might be indicative of the extent to which undeclared work is legalised through such measures.

Bibliography

Baumgartner, H.J., Caliendo, M. and Steiner, V., ‘Existenzgründungsförderung für Arbeitslose – Erste Evaluationsergebnisse für Deutschland’ [Fostering business start-ups by the unemployed – First evaluation results for Germany], in Vierteljahreshefte zur Wirtschaftsforschung, No. 75, Berlin, 2006, pp. 32–48.

Caliendo, M. and Steiner, V., ‘Ich-AG und Überbrückungsgeld – Neue Ergebnisse bestätigen Erfolg’ [Ich-AG and bridging money: New results testify success], in DIW Wochenbericht, No. 3, Berlin, 2007, pp. 25–32.

Caliendo, M. et al, ‘Existenzgründungen. Unterm Strich ein Erfolg’ [Business start ups. On balance a success], in IAB Kurzbericht, No. 10, Nuremberg, 2007, pp. 1–6.

EIRO, ‘Federal Employment Service to be reformed’, 2002, available online at: /ef/observatories/eurwork/articles/undefined/federal-employment-service-to-be-reformed.

EIRO, ‘New law passed on temporary agency work’, 2002, available online at: /ef/observatories/eurwork/articles/new-law-passed-on-temporary-agency-work.

EIRO, ‘New legislation promotes “minor jobs”’, 2003, available online at: /ef/observatories/eurwork/articles/new-legislation-promotes-minor-jobs.

Sandra Vogel, Cologne Institute for Economic Research (IW Köln)

 

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