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Do entrepreneurs need a social safety net?

Kauffman researcher Emily Fetsch highlights new external research that suggests a strong social safety net might increase entrepreneurship.

How do we create more entrepreneurs?

That’s the question on every politician’s mind as they better understand that new and young businesses create nearly all net new jobs in the United States.

According to a recent article at The Atlantic, entrepreneurship flourishes when government provides a strong safety net. The author of the piece, Harvard Business Review associate editor Walter Frick, highlights the importance of the social safety net in producing entrepreneurs with the following examples:

  • Entrepreneurs are “more likely than other Americans to receive public benefits, after accounting for income.”
  • The expansion of food stamps in some states “increased the chance that newly eligible households would own an incorporated business by 16 percent.”
  • Similarly with the Children’s Health Insurance Program (CHIP), “the rate of incorporated business ownership for those eligible households just below the cutoff was 31 percent greater than for similarly situated families that could not rely on CHIP to care for their children if they needed it.”
  • With Medicare, “American men were more likely to start a business just after turning 65 and qualifying for Medicare than just before.” 
  • Even if entrepreneurs do not participate in welfare programs, “simply knowing that they could fall back on food stamps if their venture failed was enough to make them more likely to take risks.”
  • In all these cases, the government’s social net encouraged entrepreneurship by reducing its risk.

The connection between entrepreneurship and a strong welfare state goes against a common view of the entrepreneur as a “lone wolf,” valuing independence and finding success without external supports.

The Atlantic article turns this notion on its head, demonstrating that government support may be critical in encouraging entrepreneurship.   

As the article notes with regards to SNAP, the mechanism probably looks like this: government welfare reduces the downside risks of entrepreneurship, which thereby encourages more people to engage in it.

In The Founder’s Dilemmas, entrepreneurs and non-entrepreneurs were asked about their motivations for the career they were in. Non-entrepreneurs consistently placed a high value on the security that their non-entrepreneurial job provided.

For these more risk-averse people, the perceived lack of security might be enough to dissuade them from becoming entrepreneurs. However, a stronger social safety net (for example, the system in France) may encourage more risk-averse people to consider entrepreneurial ventures, which would benefit the economy and job creation.

Entrepreneurship is a risky business. Research highlighted in The Atlantic shows that one way to support entrepreneurship is to provide a social safety net that can help an entrepreneur take the risk of starting a new business.