You can find the current accepted version in working paper form here papers.ssrn.com/sol3/papers..... We look forward to sharing the final published version once available!

Our work offers new insights for the design of active labor market policies in economies characterized by generous passive policies and structural rigidity.

A simple calibration to the Spanish economy shows that a balanced-budget increase in self-employment subsidies for the unemployed can yield substantial welfare gains in rigid labor markets. In more flexible markets, the gains remain positive but more modest.

(1) and (3) are stronger and (2) is weaker in rigid labor markets with higher firing costs. Yet the overall welfare impact is theoretically ambiguous.

The model highlights 3 mechanisms
1️⃣Direct emp. effect: + unemployed become self‑employed,⬇️unemployment
2️⃣Crowding‑out – unemp. workers shift from taking paid emp. to self-emp.
3️⃣Budget effect – subsidies can reduce UI spending in the future, freeing up fiscal space.

We develop a search-and-matching framework with firing costs to study how these subsidies interact with UI and firing costs. We evaluate their general-equilibrium interactions and the resulting employment, incentive, and fiscal trade-offs under a balanced-budget policy change.

Startup subsidies for the unemployed are increasingly used across Europe—see Spain’s “Capitalización del paro,” Germany’s “Gründungszuschuss,” and France’s “ARCE (Aide à la reprise ou à la création d’entreprise).”