Tuesday, 9 September 2014

If Your Kids Get Free Health Care, You’re More Likely to Start a Company

Starting a business is risky enough in the best of circumstances. Most new ventures fail, and the prospect of forgoing a salary is enough to keep many would-be entrepreneurs from taking the plunge.

But think about how much harder it would be if your child had a health condition, and you couldn’t get her insurance if you struck out on your own.

That’s less of a problem in the U.S. than it was a few years ago, thanks to Obamacare, but until recently it was a very real conundrum. So does the extension of publicly provisioned health insurance prompt more people to start companies? That’s the question asked by a paper released earlier this year by Gareth Olds of Harvard Business School.

Olds analyzed Census data from before and after the passage of the Children’s Health Insurance Program in the U.S. in 1997 to assess its impact on entrepreneurship. CHIP, or SCHIP as it was previously known, provides publicly funded health insurance to children whose families don’t qualify for Medicare, but whose incomes still fall below a cutoff (typically around 200% of the federal poverty line).

His results suggest that the policy did significantly increase business creation by those families affected. The self-employment rate for CHIP recipients increased from just under 15% of those eligible to over 18%. That amounts to an a 23% increase. The rate of ownership of incorporated businesses — a better proxy for sustainable, growth entrepreneurship — increased even more dramatically, from 4.3% to 5.8%, an increase of 31%.

What about all the other factors that might skew this sort of analysis? Olds used several quasi-experimental statistical methods in his research to control for such variables. The basic intuition behind his methods is that a family just above the CHIP cutoff isn’t all that different from a family just below it. Whether you make 199% of the poverty line or 201% doesn’t matter for much, except whether or not you’ll be able to enroll in the program. With that in mind, his methods zero in on this sub-group, in order to confirm that the policy actually caused the increase in firm creation.

The mechanism by which Olds believes CHIP boosts entrepreneurship is relatively straightforward: it reduces the risk of “consumption shocks,” i.e. the possibility of having to pay out a large chunk of cash unexpectedly for a child’s illness. Lower the risk and more people start companies.

Though it may seem counterintuitive given the political rhetoric around social insurance and economic growth, Olds’ is not the only research to suggest that welfare programs can promote entrepreneurship. Previous research has found that American self-employment rates jump at 65. Why is 65 a better age to start a company than 64? Because you qualify for health insurance through Medicare.

All of this serves as a reminder that bigger government needn’t discourage entrepreneurship and risk-taking. The relationship between the two ultimately depends on what government chooses to spend money on.

The final takeaway from Olds’ work is just how many business owners do depend on public programs like CHIP. “12% of households with incorporated businesses report enrollment in a public program,” he writes, not even counting Social Security, Medicare, or veterans benefits. And “disproportionately more entrepreneurs are receiving public healthcare benefits than would be expected based on their income alone.”

Overall, though, entrepreneurs still hail from disproportionately well-off families. The lesson from Olds’ paper is that starting a business doesn’t have to be a risk only wealthy people can afford to take — and the government can help.