Ways To Increase Entrepreneurship For Economic Recovery From COVID-19
This post is part of a series on the Future of Work from Tech4America
As I’ve previously written, self-employment is one of the strongest predictors of how well a regional economy can bounce back from a recession. The previous post was somewhat abstract. So, practically speaking, what can regional governments do to spur entrepreneurship?
In general, entrepreneurs need funding. This can come in the form of public cash transfers or easier access to self-employment.
Here’s a look at some evidence on these strategies:
Cash Transfers
There’s pretty robust evidence that cash transfers can meaningfully increase the number of small business entrepreneurs. Starting a business entails considerable risk: lines of credit and a cushion of savings can mean all the difference to would-be entrepreneurs who have debt or family obligations.
But, cash transfers can be tricky. If cash is contingent on unemployment, it can reduce small business formation. Indeed, one study from France found that allowing residents to keep unemployment benefits spurred small business growth.
As governments consider modifying unemployment benefits during the pandemic, or extending unconditional regular cash transfers (“basic income”), it’s important to keep in mind how it might affect entrepreneurship.
Efficient gig work
There have been a lot of anecdotes of online labor platforms facilitating entrepreneurship. “I love the fact that I’m a startup CEO and I drive for Uber,” wrote one entrepreneur, Dan Driscoll, on his experience using driving to help finance his business venture
These written testaments align with a non-probabilistic set of interviews (convenience sample) I conducted with 42 rideshare workers in 2018 (I asked a lot about different aspects of their life, so the details I was able to obtain about their entrepreneurial ventures is pretty limited).
I met one immigrant from Azerbaijan who had won his opportunity to come to America in the green card lottery. During our brief conversation in the car, he told me that he was founding a nonprofit that will help give increased access to lawyer services.
I also met a young woman near the East Bay of the San Francisco Bay Area who wanted to start a local coffee shop. She told me she was “financing it“ herself; rather than take out expensive loans, she was using the extra income she made driving to bootstrap her coffeeshop.
But, are these anecdotes part of a broader trend?
It appears so: a new working paper from a respected team of economists, from the University of Chicago and Rice University, find that entrepreneurship is a direct result of having access to efficient online labor platforms, such as Uber and Lyft. The team used the staggered rollout of rideshare companies across the US to compare similar regions who did not yet have access to the platforms.
The study found that ridesharing platforms significantly increased entrepreneurship, especially for disadvantaged populations that lack access to credit.
The conclusions, which are worth extensively quoting below:
Economists since Adam Smith have emphasized the importance of entrepreneurs and new business formation to the economy. Policymakers continuously seek for ways to stimulate entrepreneurial activity in their local regions… Our findings suggest that the gig economy plays a substantial role in spurring entrepreneurial entry by providing a form of insurance against entrepreneurial related-income volatility in the form of income fallbacks, and by providing a potential income supplement to those who engage in entrepreneurial activity. Both these mechanisms serve to reduce the risk of launching a new business. This benefit is particularly strong in cities with worse socioeconomic conditions, where policy makers may be especially interested in encouraging new entrepreneurial activity.
It’s important to note that the introduction of ridesharing platforms is different than just a simple increase in work opportunity. Access to frictionless, flexible work could be a significant factor in what makes some types of freelance work uniquely useful to entrepreneurship.
Economists tend to study ridesharing because it’s one of the only services large enough to detect in datasets. There is also evidence that other popular types of job platforms, such as home rentals, may have an impact. An economic study done in partnership with Airbnb found that in 2012–2013, around 12% of hosts in Seattle used the income to support a new business (it was not an independent analysis).
To be sure, there are serious issues with freelancing and self-employment. And, there are plenty of thoughtful critiques on the topic.
But, to the extent that self-employment can accomplish important goals, the evidence from cash transfers and access to freelancing suggests that policymakers can spur entrepreneurship and help put their regions on the path to economic recovery.
*My statement of conflict-of-interest is here.
