ENTREPRENEURIAL FINANCE

How France Used Unemployment

Benefits to Kickstart
Entrepreneurship
Walter Frick

JANUARY 8, 2015

France produces fewer start-ups than the average developed nation, and has
historically had a higher rate of unemployment. Critics are quick to blame both on its
generous welfare state. But in 2001, the nations policymakers were able to boost
entrepreneurship, according to a recent paper. And they did it by making welfare
policies even more generous.
Unemployment insurance had been a substantial deterrent to entrepreneurship in
France, because individuals without jobs ceased to be eligible for it if they founded a
business. So the French Ministry of Labor enacted a series of reforms which allowed
founders to continue to draw unemployment benefits during the first three years of their
business, subject to some restrictions, and to remain eligible for such benefits if the
business subsequently failed.
The reforms appeared to have an almost immediate effect: the rate of new firms created
rose by 25%. But researchers at MIT, Berkeley, and HEC Paris set out to determine
whether the increase was actually caused by the policy change. They wondered
whether some of the change could have had to do with the state of the economy, or

whether the quality of the new businesses was lower as a result. They found that at
least a large part of the increase was directly a result of the policy, and that the new
businesses seemed at least as productive and sustainable as older ones. Moreover,
they estimate that the change boosted the nations economy by 350 million per year, at
a cost of only 100 million annually.
To measure all this, the researchers broke up the data (from 1999 to 2005) by industry.
The idea was that it would be comparatively easier for the unemployed to start a
business in an industry where small firms are already prevalent. (Starting a business in
an industry made up of larger firms would require more capital than was provided by
unemployment insurance.) If the increase in entrepreneurship was really caused by the
reforms, it ought to be more dramatic in industries with more small firms. And thats just
what they found.
They used the same approach to measure the quality of the businesses. Start-ups
founded after the reforms in industries with more small firms the ones more likely to
have been the direct result of the reforms were just as likely to stay in business, to
grow, and to hire as those in industries with more large firms. The entrepreneurs were
equally as well-educated in both groups as well. Perhaps most importantly, the new
firms were more productive and paid higher wages than the average incumbent.
Our most conservative estimates suggest that about 12,000 additional firms are
created every year thanks to the reform, the authors conclude.
There is a narrow lesson here, and a broad one. The narrow one for policymakers is
that welfare programs can in fact distort entrepreneurial incentives, but dismembering
those programs isnt the only or best option. This is consistent with previous research,
which found that expanding government-sponsored health insurance encouraged more
people to start businesses. And that leads to the broader lesson.
Because entrepreneurs inevitably take risks, we tend to think that people who arent
comfortable with large amounts of risk wouldnt make good entrepreneurs. The data
doesnt support that view. Research from the UK has shown that in fact, entrepreneurs
are more cautious than the general population. Higher risk-taking increases the
propensity to launch a business, but does not correlate with greater start-up success,
wrote Tomas Chamorro-Premuzic, a professor at University College London, in a
previous HBR article, citing a meta-analysis of several studies. In fact, conscientious
and prudent founders tend to do significantly better. And in Frances case, the
entrepreneurs who were enticed to start something once the financial risks were
lessened were just as qualified and successful as those already in the game.
In that sense, this research is an argument about what entrepreneurship is and isnt,
and whos qualified to do it. Entrepreneurs will always take some risks, particularly with

their time and reputations. But starting a business is about more than that, and it
shouldnt include being forced to go broke in the process.