Social partners point to pitfalls in business start-up subsidy scheme

In April 2007, the Institute for Employment Research published new research results on the effectiveness of public subsidies that are granted to business start-ups by the Federal Employment Agency. The social partners maintain that unemployed persons need to be assisted in their efforts to escape unemployment. However, certain labour market measures may be prone to malpractice or abuse and therefore, their application should be reconsidered.

Background

In 2002, the federal government established the commission on ‘Modern services in the labour market’ which became known to the public as the Hartz Commission (DE0203204F, DE0212203N, DE0302105F). The Commission presented a reform proposal for the national labour market policy. Among other things, it recommended the restructuring of the Federal Employment Agency (Bundesagentur für Arbeit, BA) as well as a better use of its labour market instruments.

As a result of the Hartz Commission’s reform proposals, the so-called Ich AG was introduced in 2003. This measure was, initially, severely criticised; critics claimed that it performed the same function as another already existing measure, the so-called ‘bridge money’ (Überbrückungsgeld). Both measures granted, under certain conditions, public subsidies to unemployed persons who sought to leave unemployment by setting up their own business. Experts doubted that the establishment of a second labour market activation measure would lead to an effective increase in the numbers of business start-ups by unemployed persons and thereby reduce the unemployment level.

However, on 1 August 2006, the federal government joined the two labour market activation measures into one measure, namely the ‘start-up premium’ (in German) (Gründungszuschuss). By combining the two instruments, the federal government followed public calls to optimise the structure of the public funds granted by BA.

Survey findings

On 10 April 2007, the Institute for Employment Research (Institut für Arbeitsmarkt- und Berufsforschung, IAB) published findings on the benefits of the various subsidies (in German, 990Kb PDF). In 2003, the IAB conducted a survey among 3,000 people who had set up their own business and who had received financial assistance either from the Ich AG funds or from the grants of the ‘bridge money’. One year later, approximately 70% of the respondents were interviewed again and, when analysing their answers, the survey offers the following insights.

  • Between 2003 and 2006, BA subsidised about one million business start-ups. The Ich AG programme, in particular, developed a much better performance than had been expected at the time of its inception. Out of the one million start-ups funded by public grants, almost 400,000 of those received financial support from the Ich AG funds.
  • After 28 months, 70.4% of the male participants on the Ich AG programme and 74.6% of their female counterparts were still self-employed in western Germany; in eastern Germany, the corresponding figures amounted to 80.9% and 74.2%, respectively. As far as the ‘bridge money’ programme is concerned, the study shows that 73% of the male recipients and 68.4% of the female recipients were still running their own businesses in western Germany, and that 71.4% of men and 66% of women receiving the bridge money in eastern Germany did so.

Overall, the survey findings suggest that the effectiveness of public subsidies granted to business start-ups pursued by formerly unemployed persons should be viewed positively. Since most of the start-ups seem to survive for at least the first two years, the BA measures can be regarded as successful. However, as the social partners have repeatedly pointed out, the system of public funding has both advantages and pitfalls.

Positions of social partners

The Confederation of German Trade Unions (Deutscher Gewerkschaftsbund, DGB) maintains that unemployed persons should certainly be assisted in their efforts to leave unemployment. To grant financial assistance to unemployed persons who intend to set up a business is one way of reducing unemployment. However, in a five-point position statement (in German), the DGB argues that the effects of such measures should be observed more closely. The DGB fears that, by subsidising unemployed persons, regular workplaces might be eliminated and jobs that are subject to social security contributions might be jeopardised. In addition, it might even endanger the income of those self-employed persons who started a business without public funding.

The Confederation of German Employers’ Associations (Bundesvereinigung deutscher Arbeitgeberverbände, BDA) similarly emphasised that unemployed persons should be assisted in their search for new employment possibilities. Setting up a business should thus equally be considered for assistance; however, each business start-up initiative should be based on a sound business plan, as the President of the BDA, Dieter Hundt, emphasised in a brief statement to the press (in German).

Furthermore, the BDA suggested that BA should tighten its range of measures. Unemployment insurance contributors should not be burdened by the financing of overlapping labour market activation measures, such as the Ich AG and the ‘bridge money’ programmes. The BDA was among those who proposed to join both instruments into a single measure. It also highlighted the importance of strict control mechanisms to prevent the fraudulent use of public money.

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

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