As Congress negotiates the next COVID-19 relief package, it is clear that the size and incentives surrounding unemployment benefits will be a major focus of contention between Republicans and Democrats in the Congress. We add another proposal to the mix: use unemployment insurance to encourage entrepreneurship as well as traditional employment. At present, in all but five states unemployment insurance only encourages employment pathways into traditional salaried jobs offered by existing companies, even though there are not enough jobs to go around. Fortunately, a solution already exists and is underway in those five states — Delaware, Mississippi, New Hampshire, New York, and Oregon. It’s time to expand it across the nation.
The Covid-19 pandemic has wreaked havoc with public health and the economy in America. As a result, tens of millions of Americans have filed claims for unemployment benefits since March. Yet our unemployment policies have not kept pace. Our unemployment system is still based on an industrial-era model, where society looks to established companies to create needed jobs. Evidence of searching for those established jobs is, therefore, typically the requirement for sustained unemployment benefits.
But that model only partially makes sense, as opportunities for entrepreneurship are often more readily available — with vast amounts of information accessible online to guide aspiring business-starters. Americans have an appetite for starting businesses and many self-employers make more over the course of their lifetime. And, as Jack McKelvey, the co-founder of Square, has repeatedly asserted, a recession is a great time to start a business, given reductions in real estate costs and increases in the availability of talented workers.
Even in the cases of business failure, the experimentation and learning opportunities provided by starting a venture gains the entrepreneur valuable skills when they return to a traditional job. Why, therefore, shouldn’t unemployment insurance encourage that as well? Indeed, the latest CARES Act declared that independent contractors, freelancers, and sole proprietors are considered businesses for purposes of getting loans backed by the Small Business Administration (SBA). That should now be reflected in our approach to unemployment benefits.
The aforementioned five states — Delaware, Mississippi, New Hampshire, New York and Oregon — have implemented a little-known solution called Self-Employment Assistance (SEA) which can be rapidly expanded. The existing federal SEA program, created years ago by the US Department of Labor in partnership with the Small Business Administration, provides the component parts for states to build SEA systems to support entrepreneurs. It is specifically designed to help states create the infrastructure to assist individuals eligible for unemployment insurance pursue entrepreneurship.
States that opt into this program can pay dislocated workers a weekly SEA allowance — the same amount that an individual would receive in unemployment benefits — with the individual encouraged to work full-time on his or her new venture instead of seeking a job. SEA also supports a wrap-around infrastructure through which participating individuals receive entrepreneurial training, business counseling, and technical assistance.
A Hamilton Project analysis of previous incarnations of entrepreneurial assistance programs, dating back to the 1980s, points out that well-designed programs pay for themselves and that program benefits exceed the costs. Business formation rates documented for participants in New York’s program indicate that approximately a third of SEA participants launched their own ventures after participating in the program. Statistics from 2013-2014 further show that about 16% of them employ another person and their income in the first year of business is roughly equivalent to the median income of all self-employed people in the state.
But consistent SEA funding — and, therefore, staffing — have not always been available to each state. As a result, previously active programs in states such as Maryland, Pennsylvania, and Maine have closed. Now is the time to provide consistent funding for SEA, so that states can draw on the program more broadly. With employment so hard to find, everyone should have the option to be an entrepreneur, whether that means starting a new business, doing self-employed work, selling their services as a freelancer or engaging as an independent contractor.
Sixty-two percent of Americans surveyed have a dream business in mind; 41 percent would start it in six months if they had the tools and resources they needed. Yet our unemployment system acts like handcuffs on those entrepreneurial dreams. To remove those handcuffs, we should leverage the SEA program and readily scale it up with some updated thinking and investment.
The federal government should incentivize SEA participation through state grants as part of the next stimulus package. The grants should be of a size to adequately staff and sustain the program and ensure that there is a strong statewide entrepreneurial support network in place to assist emerging entrepreneurs and small business owners. The need is particularly severe in rural communities and under-connected urban neighborhoods.
We calculate that an allocation of $250 million would enable effective SEA programs and test what could become a central component of unemployment responses as the full contours of the next recession manifest.
America’s can-do spirit is needed more than ever, as our fellow citizens adjust and recover from the pandemic. It’s time to see what American entrepreneurship looks like at full throttle.
Christopher Gergen is CEO of Forward Cities, where Nic Gunkel is VP of Ecosystem Impacts.
Bruce Katz is the founder of the Nowak Metro Finance Lab at Drexel University and a Partner with Accelerator for America.
Victor Hwang is founder of “Right to Start” and former VP of Entrepreneurship at the Kauffman Foundation.