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Self-employment promotion as active labor market policy: Design and trade-offs in rigid labor markets

Author

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  • Garcia-Cabo, Joaquin
  • Madera, Rocio
  • Xie, Zoe

Abstract

This paper analyzes self-employment subsidies for the unemployed, a common policy in Europe. We develop a search model with self-employment to study how startup funding affects employment and welfare via individual choices and equilibrium forces. The model identifies three channels: (1) direct unemployment reduction, (2) crowding-out effect on paid-employment, and (3) a budget effect, whereby startup subsidies can generate fiscal savings. (1) and (3) are increasing with labor market rigidity. A simple calibration quantifies these channels and compares welfare effects across labor market structures.

Suggested Citation

  • Garcia-Cabo, Joaquin & Madera, Rocio & Xie, Zoe, 2025. "Self-employment promotion as active labor market policy: Design and trade-offs in rigid labor markets," Economics Letters, Elsevier, vol. 257(C).
    • Handle: RePEc:eee:ecolet:v:257:y:2025:i:c:s0165176525004938
    DOI: 10.1016/j.econlet.2025.112656
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    References listed on IDEAS

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    1. Joaquín García‐Cabo & Rocio Madera, 2024. "Does Self‐employment Pay? The Role of Unemployment and Earnings Risk," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 86(5), pages 1163-1197, October.
    2. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(3), pages 381-402.
    3. Garey Ramey & Wouter J. den Haan & Joel Watson, 2000. "Job Destruction and Propagation of Shocks," American Economic Review, American Economic Association, vol. 90(3), pages 482-498, June.
    4. Caliendo, Marco & Künn, Steffen, 2011. "Start-up subsidies for the unemployed: Long-term evidence and effect heterogeneity," Journal of Public Economics, Elsevier, vol. 95(3-4), pages 311-331, April.
    5. Herreño, Juan & Ocampo, Sergio, 2023. "The macroeconomic consequences of subsistence self-employment," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 91-106.
    6. Johan Hombert & Antoinette Schoar & David Sraer & David Thesmar, 2020. "Can Unemployment Insurance Spur Entrepreneurial Activity? Evidence from France," Journal of Finance, American Finance Association, vol. 75(3), pages 1247-1285, June.
    7. Dale T. Mortensen & Christopher A. Pissarides, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(3), pages 397-415.
    8. Sergio Ocampo & Juan Herreño, 2023. "The Macroeconomic Consequences of Subsistence Self-Employment," University of Western Ontario, Departmental Research Report Series 20231, University of Western Ontario, Department of Economics.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

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    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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