The Effect of Unemployment Insurance Benefits on (Self-)Employment: Two Sides of the Same Coin?

Abstract

Although active labor market policies often subsidize unemployed individuals to start their own businesses, little is known about the role of unemployment insurance (UI) generosity for self-employment. Exploiting the 2012 labor market reform in Spain which increased a discontinuity in the UI benefit schedule, we estimate the causal effect of lower UI generosity on the extensive margin of (self-)employment. We find heterogeneous effects: while the job-finding rate increases, the startup rate decreases. The reform’s unintended negative effect on self-employment (35-50%) outweighs the positive effect on re-employment (5-30%). The combined employment effect is smaller than analyses focusing only on re-employment suggest.