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The Inclusive Economy
Entrepreneurship and Complementarity
By Steve Crawford, Senior Fellow on 06/02/2011 @ 01:00 PM
Last time I talked about the unappreciated complementarity between high-potential and small business entrepreneurship, noting that the “creative destruction” generated by the former makes the adaptability of the latter all the more critical to the achievement of shared prosperity. Since that posting, I have had an opportunity to read the just-released Kauffman Thoughtbook 2011. As with the previous four volumes, it contains dozens of informative and thoughtful articles. One that stands out for its relevance to the complementarity point is the piece by the distinguished economist, William Baumol.
Although Baumol emphasizes the importance of innovative entrepreneurs for long-term growth, he adds that during recessions, “it is those replicative entrepreneurs who open retail shops or other businesses of the standard variety that are most effective in creating new jobs and thereby aid in the economic recovery.” He goes on to say: “Of course, these replicative entrepreneurs do not act alone. Success in their business efforts requires the help of others – especially those who provide them with loans and those who educate them in the relevant regulations governing their businesses, among others.”
This and my next post will examine two exceptionally promising programs for providing such assistance. The first focuses on a plan for expanding the Self-Employment Assistance Program (SEAP), a federal program for facilitating self-employment by individuals collecting unemployment insurance. The second examines CFED’s Self-Employment Tax Initiative (SETI), a scalable approach to assisting the owners of existing small businesses, especially those with adjusted gross incomes of less than $50,000.
The U.S. Department of Labor’s Self-Employment Assistance Program allows unemployed workers who are eligible for Unemployment Insurance (UI) to collect self-employment allowances equal to UI benefits while starting their own business instead of searching for an existing job, as long as they obtain the prescribed entrepreneurial training. Established in 1993 after carefully evaluated pilots, it is a classic example of a promising initiative that has not begun to achieve its potential for reasons of program design and implementation.
The most authoritative analysis of the SEAP pilots and program is Steve Wandner’s in Chapter 8 of his book, Solving the Reemployment Puzzle: From Research to Policy (Upjohn Institute, 2010). Wandner is a former senior economist at the U.S. Department of Labor (DOL) who had major responsibility for the SEAP pilots. For our purposes, his key points are:
- The random-assignment demonstrations in MA and WA showed that the piloted programs, which varied slightly, “increased business starts among project participants, reduced the length of their unemployment, and increased their total time in employment, which includes self-employment plus wage and salary jobs. In addition, the Massachusetts demonstration also had a substantial positive impact on participants’ earnings.” Moreover, both program models proved to be cost-effective for project participants, society as a whole, and in the case of MA, for the government.
- Current participation in the SEAP is tiny and falling. The law authorizes but does not require states to offer the assistance, and only seven states -- DE, ME, MD, NJ, NY, OR and PA-- currently participate. Even in these states, few unemployed workers are being served, the total amounting to only 1,469 in 2008. That represents far less than 1 percent of UI recipients in those states and less than one tenth of one percent for the country as a whole. By contrast, the rates for similar programs in Europe are 2.26% in France, 4.9% in Italy, 4.74% in Hungary, 2.72% in Sweden, 3.94% in Spain and 12.88% in Germany.
- The reasons for the low participation rate in the U.S. are that the SEAP program is burdensome for states to establish, expensive for states to operate (because they must find funds for the required entrepreneurial training), and a bureaucratic step-child. UI administrators are ambivalent about the program, and the performance measures for workforce one-stop centers discourage positive action when referrals do come from UI. Occasionally, a committed state manager is able to expand participation by obtaining training support from SBA’s Small Business Development Centers or other sources and by aggressively publicizing the program to UI recipients, but those success stories have ended when the manager moved on.
Senator Ron Wyden (D-OR), a sponsor of the original legislation, has drafted a new bill that addresses many of the problems with the existing act. This bill would “federalize” the program temporarily, enabling rapid implementation. The challenge now is to enlist co-sponsors for it.
No one claims that self-employment is a silver bullet, but according to Wandner, a properly designed program would yield jobs for 1-2 percent of the unemployed covered by UI. The cost would be about $3,350 per job, which is an incredible bargain by current standards for job creation. Given the long-term unemployment disaster that the country is now experiencing, there is no excuse for not following Baumol’s advice and getting serious about self-employment assistance.
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