Start‐up subsidies in East Germany: finally, a policy that works?

Purpose – The purpose of the paper is to estimate the effectiveness of two start‐up programs (bridging allowance and start‐up subsidy) in East Germany. Design/methodology/approach – Using a combination of administrative data from the Federal Employment Agency and a follow‐up survey (for roughly 1,300/1,000 participants/non‐participants), the analysis is based on the conditional independence assumption. Kernel matching estimators are applied to estimate the treatment effects and test the sensitivity of the results using a conditional difference‐in‐differences approach. Findings – At the end of the observation period both programs are effective: unemployment rates of participants are lower, and employment rates and personal income are higher when compared to non‐participants. Additionally, first descriptive evidence of the additional employment effects through direct job creation is presented, which is quite significant for the bridging allowance and negligible for participants in the start‐up subsidy. Research limitations/implications – Participants in the start‐up subsidy are in their third year of participation at the end of the observation period and mostly still receive further support (although at a reduced rate). Therefore, the results for this program have to be treated as preliminary. Practical implications – In contrast to other active labor market programs that have been evaluated recently (including job‐creation schemes and vocational training programs) this paper finds considerable positive effects for start‐up subsidies. Hence, programs aimed at turning the unemployed into entrepreneurs may be a promising strategy in East Germany. Originality/value – This is one of the first studies that allows inferences to be drawn about the effectiveness of start‐up programs in East Germany. Most previous studies on the effectiveness of active labour market policies in the Eastern part of Germany neglected these programs.