#GEWPolicy Spotlight: French Unemployment Law Supports Startups
GEN France Board Member Bruno Berthon and GEN President Jonathan Ortmans look at how France's unemployment law, which allows founders to collect benefits for up to two years, has impacted the country's startup rate.
Bruno
Berthon
8 Nov 2021

This article is part of a Global Entrepreneurship Week (#GEW2021) series putting a spotlight on policies designed to help entrepreneurs start and scale, and the crucial role policy makers play in building a strong entrepreneurship ecosystem.

A key pillar of the Kauffman Foundation’s America’s New Business Plan is for governments to support the ability of people to take the risk of starting a new business. This is because many people with the skills and ideas to found a new enterprise find themselves locked into their current jobs. As the Foundation puts it, “When entrepreneurs strike out on their own, they leave behind the salary and benefits an employer provides. Assuming the full risk of failure, they are responsible for health care, retirement savings, and other necessities they, their families, and their employees depend on.” The Foundation found that in the U.S., nearly half of entrepreneurs feared the loss of job security before they started their businesses.

Unemployment benefits may provide a safety net, but in many cases, these are removed as soon as an individual starts working. In France, unemployment insurance was seen as a barrier to entrepreneurship because individuals lost their eligibility when they founded a business. In response, the Ministry of Labor enacted a series of reforms that allowed founders to collect unemployment benefits for up to two years from launching their business and to continue to do so in the event that the business failed. (See the GEN Atlas.)

The reforms had an almost immediate effect: the rate of new firms created rose by 25 percent, that is, an additional 12,000 firms were being created every year. Professor Johan Hombert has studied the effects of the reforms. (See How Unemployment Insurance Can Foster Business Dynamism in HEC Paris). 

According to Prof. Hombert, the reform has two advantages. “First, it provides downside protection to the entrepreneur.” Because many people with promising business ideas hold back from starting a new business because of financial commitments, “providing entrepreneurs with a fallback option allows them to experiment with new ideas.” Second, it is potentially very low cost. “If new businesses are profitable, little benefits will actually be paid out. The government may even save money if the reform shortens unemployment spells.” These advantages are confirmed by data on new business creation from the French Statistical Office.

To determine whether the reforms resulted in entrepreneurs whose businesses become engines of job creation and economic growth, Prof. Hombert examined the data over time. He found that “the number of new businesses with at least one employee after two years increases significantly after the reform, from about 3,500 to 5,000 per month.” This means that a significant fraction of businesses created through the reform grow and create jobs. He found similar results when he counted the number of new firms with at least two or three employees. He also found that these new firms are not any more likely to fail, and are not any less likely to be profitable compared to firms started before the reform.

A lesson for policymakers is that reducing the downside does encourage prospective entrepreneurs to start new businesses. And a significant number of those entrepreneurs succeed and create jobs. “Becoming an entrepreneur is a courageous act,” the Kauffman Foundation wrote. “Policymakers around the world must act to ensure the next generation of entrepreneurs is not locked out of opportunities to improve their economic situations by helping Americans build wealth and addressing their real financial concerns that limit risk-taking.”

Bruno Berthon

Senior Strategic Advisor | BFB Consulting

Bruno Berthon is a member of the board of directors of GEN France. Most recently, he served as the Managing Director for Accenture Strategy across… More

Jonathan Ortmans

President | Global Entrepreneurship Network

Jonathan Ortmans is founder and president of the Global Entrepreneurship Network (GEN), an organization that provides a platform of… MORE