Anna Kucinska
01 July 2014

EU’s Mutual Learning Programme: social entrepreneurship – better value than wage subsidies

The EU’s Mutual Learning Programme’s thematic event on job creation incentives (25th June 2014) found that wage subsidies are largely useless. Job search and training measures are more effective. And support for unemployed people to set up their own businesses can successfully create additional jobs. Active labour market policy still ignores the potential of social enterprise.
How Member States use job creation incentives
Anna Manoudi of ICF-GHK introduced proceedings with a summary of the expert reports from 33 countries. Three rationales for job creation incentives were mentioned:

  • economic: to support the demand for labour by reducing employer’s costs
  • social: to target jobs at disadvantaged groups
  • upskilling: to build people’s employability in the next upturn

Such measures typically consist of wage subsidies, rebates on social security contributions, the conversion of temporary into permanent jobs, and – in minor place – support for entrepreneurship and self-employment.
Apart from giving work to unemployed people, they can have other benefits such as desegregating the labour market and preventing long-term unemployment. Unwanted side-effects include deadweight, displacement, substitution, creaming, over-reliance on short-term job-specific training, disincentivising skills development and abuse by employers. Evaluations show that employers like direct wage subsidies but reductions in social security contributions either have no effect or benefit higher-paid workers.
No demonstrable effect
Recommendations are that aid should be adequate to cover hiring costs and proportionate. It should be tightly targeted and closely monitored. It is held to work best in the private sector because the public sector is prohibited from side-stepping recruitment procedures for permanent jobs – but this view was contested by Jósef Niemiec of the ETUC and by evidence from the Czech Republic. It should be accompanied by counselling, help with job search, childcare and transport and an improved environment for business. There are some creative examples such as the way that Cyprus aids seasonal workers in order to lengthen the tourist period.
However, overall there is no demonstrable impact on the distribution of jobs and incomes. Measures that combine employment with training work better. It is best to limit them to times of recession where such combined measures can enable firms to retain a skilled workforce until the economy improves.
The economic irrationality of wage subsidies was pointed out by Susanne Kraatz of the German Labour Ministry who said roundly that they had no economic rationale, only a social one. They do not increase the total number of jobs, only redistribute work to disadvantaged people.
Ich AG worked but was scrapped
Udo Brixy of the German Institute for Employment Research (IAB) said that the fundamental dilemma of active labour market policy is that it is a cyclical tool. The only way to address structural unemployment is to create new firms. He had made an a analysis of the Ich AG which between 2003 and 2006 brought approximately 400,000 new self-employed businesses into existence. These were truly additional and mined into new sources of entrepreneurial drive. Yet the scheme was cancelled in 2006. Brixy noted that most of these jobs were created in cities like Munich, Frankfurt and Hamburg. It offered no solution for depressed rural areas such as Mecklenburg-Vorpommern where there is not enough demand to support new businesses.
Anyway, are wage subsidies legal? Salim Medghoul from the Competition DG explained the regulations on state aid. Aid for disadvantaged workers falls under a block exemption: it is allowed up to 50% of the cost and Member States only have to notify the Commission if it exceeds €5m for any one employer. For disabled workers, 100% of the cost may be met, and the notification threshold is €10m per employer. In any case, the Commission rarely takes action in cases of dispute: in the last five years it has intervened in fewer than 30 cases. If it does investigate, it tries to balance the common interest being served (employment) with the necessity and proportionality of the aid given. It is the most tightly targeted and most generous schemes that cause the greatest problem.
Aurélie Duprés from ENSIE remarked that it was odd to include young people as a “disadvantaged group” when they should be the driving force of Europe. This sends the wrong message. Better, in ENSIE’s view, would have been a short-term programme to create youth employment.
Europe is creating good jobs in computing and bad jobs in care
Donald Storie from Eurofound took a look at where new jobs are actually to be found. The answer is in two places, at the two extremes of the labour market. At the top, knowledge-intensive end, the computer programming sector has been growing all the way through the economic crisis and created 180,000 jobs between 2011 and 2103. At the bottom end, personal care generated 130,000 jobs in the same period. Note that it is in the latter sector where we have a lot of social enterprises.
Two things struck me:
Firstly, the analysis of entrepreneurs based on the Global Entrepreneurship Monitor (GEM) divides entrepreneurs into two camps:

  • opportunity entrepreneurs who seek money and independence
  • necessity entrepreneurs who have no alternative

Half of entrepreneurs are the first sort, a quarter are the second sort and the final quarter fall between the stools: they had been thinking of going self-employed and losing their job pushed them into it. Over time, both types of enterprises create jobs for about six other people too. So policy should support both.
As I previously remarked, this bipolar split seems to ignore the fact that social entrepreneurs are a hybrid between the two. They make an opportunity out of necessity by using entrepreneurial means to address social problems. They have been growing consistently throughout the current recession – by 27% between 2002-2003 and 2009-2010 according to CIRIEC (p49). Yet they seem not to show up on the radar of official labour market analysis. There is plenty more work on visibility for the Social Business Initiative Mk II to do!
As usual, social enterprises were largely ignored. But there is a glimmer of hope that policy-makers are paying attention to them. Kristýna Čechová from the Czech Ministry of Labour and Social Affairs gave the results of the counterfactual evaluation of support area 1.1 of the Human Resources Operational Programme. Based on a sample of 34,000 firms, this showed that ESF support increased employment by 8% in medium-sized firms and by 15% on large firms. It also increased profitability in large firms. However the number of small firms taking part was too small to yield any significant results.
What is interesting is the ministry is in the course of doing similar evaluation of support for social entrepreneurship, its results ought to be released at the end of 2014.
Wage subsidies – part of an integration itinerary
The second elephant in the room was the work that the Commission has already done on active labour market policies. Back around 1990 the ERGO programme promoted the ‘integration itinerary’ which proposed that when helping people into the labour market, it made sense to use the cheapest instruments (e.g. job counselling and placements) first, more expensive ones like training next and only when they were exhausted - expensive measures such as wage subsidies. Yet this thematic event looked at only one end of the spectrum of integration measures.
The potential of value-based and collective entrepreneurship certainly deserves closer attention from labour market policy-makers.
The seminar report is downloadable here.
Toby Johnson