September 2, 2014

Stop Trying to Turn the Unemployed into Entrepreneurs

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Here’s an idea that policy makers like: Take the unemployed, give them entrepreneurship training, and turn them productive, tax-paying business owners.

Of course the politicians love the idea. It gives unhappy, out of work people a shot at the American dream and reduces unemployment at the same time.

There’s just one problem. It doesn’t work.

We’ve had this type of policy in place since 1993, when the federal government created the Self-Employment Assistance (SEA) program to provide small business training and advice to people receiving unemployment insurance. To help turn the jobless into entrepreneurs, participants in the program get entrepreneurship education and advice and receive their unemployment insurance payments without having to look for a job.

The gold standard for evaluating whether a government policy works is to run an experiment. If some people are randomly assigned training and assistance and others are not, then observers can see whether the government-provided help has any effect, while ensuring that the group receiving the treatment is no different from the group that didn’t receive it.

In the mid-2000s, the Department of Labor designed just such an experiment to see if entrepreneurship assistance and training increases small business ownership and performance. To assess the benefit of the government help, participants in the Growing America through Entrepreneurship (GATE) program were randomly assigned to receive entrepreneurship assessment, training and counseling or to serve in a control group that received none of these. Researchers then observed whether those that got the help had a higher rate of business ownership and small business performance over the following five years.

In December of 2009, the Labor Department released the results of this study; and they are instructive. Compared to the control group, the recipients of the entrepreneurship training and assistance:

• Were no more likely to own a business
• Had no lower rate of business closure
• Earned no greater self-employment income
• Had no greater sales
• Had no more employees
• Were no less likely to receive unemployment benefits
• Were no less likely to receive public assistance benefits.

In fact, those who received the training and assistance were five percentage points less likely than the control group to have received a business loan, and had invested only invested 70 percent as much in their businesses. And those who received the government’s help were more likely to find getting customers to be a challenge than those who received no assistance.

These results followed an earlier experiment in Massachusetts in which the random assignment of entrepreneurship training and assistance did not increase self employment income or the odds of working for oneself five years later.

An experimental study in Washington showed that entrepreneurship training and assistance was beneficial over a shorter period of time. And other studies have shown correlations between government help and the odds of being an entrepreneur and entrepreneurial performance. However, to date we have no solid, experimental evidence of the long term benefit of entrepreneurial assessment, training and counseling on the tendency to be an entrepreneur or performance at small business ownership.

This result has an important implication: government efforts to help people become entrepreneurs don’t make people more likely to run their own businesses or do a better job at managing them.

Would America would benefit more if we gave the resources used to fund these ineffective programs back to small business owners? It’s a plausible hypothesis and one worth testing.

So here’s what I propose: Give those with a different set of beliefs about how to enhance small business performance a chance to test their ideas. Let’s randomly assign a tax cut to some small business owners and see if the businesses paying less employ more people five years down the road.

18 Comments ▼
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Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

18 Reactions

  1. Hi Scott,

    I happen to know the REAL reason why the program never worked, but is never talked about;

    The folks who were given entrepreneurship training, for the most part, didn’t have enough money to begin with-to start their own businesses.

    Scott, I’d really like to purchase (or lease) a 7-Series BMW.

    Sure, I could go to my local Cleveland BMW dealer and drive one, learn about the hundreds of buttons and bells, and whistles while I’m there. But, all I would end of doing is wasting the salesperson’s time, and knocking a couple of points of my credit score, by applying at several banks for the loan.

    I can’t really afford a $1200.00 monthly payment. But, it was a fun learning experience.

    The Franchise King

  2. Scott

    I appreciate you sharing the information – I do not want to appear in a “shoot the messenger” mode, yet I have to weigh in on Joel’s side. The details are always hidden in the data! And we all know the devil hides out in the details. Having worked with 100′s of startup entrepreneurs myself the last decade – training is never the number 1 key to success as an entrepreneur, nor is the idea/product what drives the success. The number one factor determining the success of an entrepreneur is the entrepreneur themself. The mindset, the attitude, the drive, the determination and the motivation (reason) they decide to be an entrepreneur. Joel also identifies a key component – the financing they have to make sure they get through the start-up phase. Thanks for the idea though to re-direct the funding to a worthy program – that I agree with 100%

    I did a series on my blog about entrepreneur success you may be interested in: It starts here http://www.beasuccessfulentrepreneur.com/characteristics-of-success-attitude/

    Again Thanks a million
    Glenn

  3. I love your suggestion because it will benefit people who already have shown a desire and aptitude for entrepreneurship. Let’s be honest; most people aren’t cut out for entrepreneurship, and that’s okay. I don’t mean to belittle anyone for not starting a business, but the government would be much better off putting their money into business owners DOING entrepreneurship than TRAINING randomly assigned people about entrepreneurship.

  4. hello Mr Shane,

    If an entrepreneurship training would continuously be *randomly* given to unemployed and that unfavorable results will be expected again. I only would say, that “entrepreneurship” is more on “Leadership” and on that mere fact, we cannot expect great outcome for that said government project.

    Taking for instance 100 unemployed, the possibility on percentage is: there might only 3 to 5 percent of them that are inclined to becoming leader and it thus mean, that about 95% to 97% of them would prefer to “follow” (as an employee) rather than to “lead” (as an entrepreneur)… Furthermore, government should not “take” it on a random … it should be on a careful selections from those 100 people the top 3 to 5 and the remaining 95 to 97 will then be subordinates to selected few…..

  5. Hmmm, I both agree and disagree with your position, Scott. :)

    I agree that people who aren’t really entrepreneur material shouldn’t be actively encouraged to try something they are ill suited for and unlikely to be successful at. That helps no one. It sets up individuals to become failures (another blow to their self-esteem at a time when they are undoubtedly feeling low already), not to mention putting their and their families’ financial well-being at risk. And it’s a colossal waste of taxpayer money.

    However, here’s where I part company: I do believe that those who have started a business and have demonstrated some efforts at growing it, should be able to collect unemployment checks. I know people who have started businesses and actually are earning from the business. But as startups are dry periods in the beginning, they still need unemployment to bridge that startup period. They find themselves caught in bizarre Catch-22s where they either have to deem themselves employees of another small business they are providing services to (instead of independent contractors) if they want to continue collecting unemployment, or they have to give up unemployment. I think some of the outcomes I have heard of and seen firsthand are utterly ridiculous, and don’t serve anyone well.

    If there is indicia of a true business endeavor then I think they shouldn’t have to choose between that and staying on the public dole, or worse, lying about the income they are receiving (please, don’t anyone ever do that).

    I know it’s not easy to sort out those who truly show they are involved in a business, or not. But our laws, such as the tax laws, make these judgments all the time.

    - Anita

  6. Hi Joel,

    I believe in getting unemployment while someone is starting a business, under certain circumstances. It’s a temporary bridge to help pay living expenses.

    However, beyond that, I’m not a big believer in going into debt to start a business. Debt is a ball and chain around your foot at a time when you need to run hard and fast. Worse, it often obscures a business that doesn’t have the right business model to make it, and it lulls the owner into a false sense that the business is doing OK when it might not be. Too often it just delays the inevitable and makes their money woes even worse.

    I prefer to advise entrepreneurs to: tighten their belts, hyperventilate a little (it’s motivating), and redouble their efforts to bring in customer monies. It sounds ruthless, but I prefer to think of it as tough love. Starting a business isn’t for the faint of heart.

    - Anita

  7. Hi Anita,

    I totally agree.

    When I wrote that, “the folks who were given entrepreneurship training, for the most part, didn

  8. I disagree, from a viewpoint of an emergency planning consultant; individuals should start planning (thinking out-of-the-box) to take advantage of any government training program to expand their livelihood capabilities. Whether, they start a business or not, the entrepreneur training will enlighten them with an alternative life choice. I

  9. If you’re looking for a small business startup opportunity with relatively low starting costs, you might consider college pro painters. They give you training and support, and it’s cheap enough that most of their franchisees are students. Many of them go on to hugely successful business careers.

    It’s a pretty good way to get your start as an entrepreneur… even if you don’t have any previous training or experience.

  10. I think here’s the line where I write: It’s all about the money. Sad, but true. We live in a world where people can do business across borders and into a whole new flat world. What the unemployed need is a real training on how to be globally competitive. Anyone can be an entrepreneur these days so long as you got the funds to make your ideas come to life. Now, who will provide the funds?

  11. Good post. Now how much did the government spend on this project?

  12. Hi Joel,

    That’s a very interesting post!

    From my experience (both in academia and as entrepreneur) there are people that can be entrepreneurs and some others not! You cannot just teach somebody to become an entrepreneur; one must really want to follow that route in their lives, otherwise they are destined to failure!

  13. I happen to agree with Peter Drucker’s assessment that one reason small businesses fail at a 50% rate within 5 years (per U.S. SBA) is that most do not know what they are doing. Let’s face it, “starting a business” in the U.S. is quite a simple task: file some paper work and you’re on your way. I, for one, believe that more entrepreneurship training is needed, not less. Whether the U.S. government should be the entity providing the training is another discussion altogether, but I believe that training will indeed- in the long run- assist in giving the unemployed the skills and confidence necessary to succeed in business. Understanding the financial requirements, the uncertainty, the market dynamics, the lonely days and nights, the inevitable setbacks, etc. etc. BEFORE starting a business will go a long way in reducing the failure rate of small businesses and, in the process, improve the long term health of the U.S. economy.

    Dino Herbert
    “Passionate about helping people reach their entrepreneurial potential”

  14. Do you have experiences from other parts of the world when it comes to starting companies with unemployed people? I have a friend who recently went to America in order to study the entrepreneurship and bazaar malls by immigrants, specifically from Somalia. It has been a huge success in Minnesota. In Gothenburg, Sweden, many of the Somalis are unemployed and living on welfare.

  15. I think the answer to this is providing the legal means to let investors invest into smaller early stage companies which will create jobs. I am for providing tax breaks to investors that invest their funds to create jobs (pulling people off unemployment).

    let the people with money put it back into the people that need it the most.

    jake sigal
    ceo livio radio

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