From unemployed to self-employed

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From unemployed to self-employed a program analysis
Puls, Barbara
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159 leaves : ; 28 cm


Subjects / Keywords:
Unemployed ( lcsh )
Self-employed ( lcsh )
Occupational retraining ( lcsh )
Occupational retraining ( fast )
Self-employed ( fast )
Unemployed ( fast )
bibliography ( marcgt )
theses ( marcgt )
non-fiction ( marcgt )


Includes bibliographical references (leaves 96-102).
General Note:
Submitted in partial fulfillment of the requirements for the degree, Master of Arts, Department of Economics.
Statement of Responsibility:
by Barbara Ann Puls.

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Source Institution:
University of Colorado Denver
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Auraria Library
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
19817882 ( OCLC )
LD1190.L53 1988m .P84 ( lcc )

Full Text
Barbara Ann Puls
B.A., Simmons College, 1981
A thesis submitted to the
Faculty of the Graduate School of the
University of Colorado in partial fulfillment
of the requirements for the degree of
Master of Arts
Department of Economics

This thesis for the Master of Arts degree by
Barbara Ann Puls
has been approved for the
Department of

Puls, Barbara Ann (M.A., Economics)
From Unemployed to Self-Employed: A Program Analysis
Thesis directed by Professor Suzanne Helburn
The problems of poverty and unemployment
continue to persist in the United States despite
government efforts toward their alleviation. In
addition to these traditional problems, structural
changes in the U.S. economy are resulting in another
problem: structural unemployment.
Existing policies were designed to address the
needs of individuals temporarily unemployed or between
jobs and the requirements of those unable to work due
to family responsibilities, age, or physical
constraints. The structurally unemployed do not meet
these parameters. Typically, they are well-trained,
well-paid individuals with long work histories, whose
skills have become obsolete due to technological
changes in the production process. They present a new
type of unemployment problem to public policymakers.
Transfer payment investment offers policymakers
a new option. This policy has been tauted by some as
having the potential to address the needs of the
structurally unemployed and the long-term unemployed

welfare recipient. A public policy based on transfer
payment investment for self-employment would provide
the unemployed population with an additional route to
economic self-sufficiency.
Others argue that self-employment programs
would improve the living conditions of very few
individuals. They maintain that many would suffer from
being encouraged to launch businesses that would fail
and that even if the businesses did survive few would
ever escape the confines of the informal sector.
Self-employment training and transfer payment
investment are being experimented with throughout the
United States and the world. Activity in this country
is gaining support and momentum in the federal and
state governments. It is a public policy that should
be examined, experimented with, and given a role as one
more option in the effort to reduce poverty and
The form and content of this abstract are approved,
recommend its publication.

I. INTRODUCTION....................................1
UNITED STATES ECONOMY..........................6
The Changing U.S. Economy......................6
Labor Market Policy...........................11
Transfer Payment Investment...................14
Entrepreneurial Activity......................16
Formal vs. Informal Sector....................19
Small Business Growth and
Job Generation..............................24
Lack of Access to Capital....................2 8
Criticisms of TPI............................3 0
Justifications for TPI........................37
Economic Growth and Economic
Development-The Role of
FOR THE UNITED STATES.........................47
Lessons for the United States.................53
THE UNITED STATES.............................63
Types of Programs.............................63
"Ideal" Program Characteristics...............74
Evaluation of Programs........................77

Program Participant Characteristics..........79
Types of Businesses Started..................83
"Ideal" Evaluation Parameters.................88
V. CONCLUSION.........................................92
State Programs.....................................103
Local Governments..................................123
Private Sector Efforts............................12 6
Federal Government.................................150
Programs in Other Nations..........................150

1. U.S. Self-Employment Training
Program Characteristics.....................64
2. U.S. Program Financial and
Other Assistance Characteristics............69

Forging a link between economic development and
welfare reform is an issue of growing importance.
There is a movement underway across the country to
assist the recipients of government transfer payments
to move not only from the welfare roles to payrolls but
also to profit-making, entrepreneurial activities.
This paper analyses the potential for forging this link
through allowing investment of transfer payments in
entrepreneurial training and self-employment programs
for low-income and unemployed persons.
Specifically, this paper examines whether
entrepreneurial training and self-employment programs
that encourage small business development can address
the economic self-sufficiency needs of transfer payment
recipients and generate new jobs for the economy at
large. The evidence shows that although programs of
this type can provide an opportunity for economic
advancement for some unemployed and low-income
individuals, only a small percentage of the new
businesses generate jobs for people other than the

Within the last 15 years, the role of the U.S.
economy within the global marketplace has changed
dramatically. As the U.S. economy has undergone a
structural shift from manufacturing to services, states
have experienced major economic changes. Plant
shutdowns or relocations overseas have affected state
and local economies greatly. These changes have
created fluctuations in local labor markets. Many
skilled manufacturing workers, after years of steady
work, are finding themselves unemployed and with no
prospects of finding employment.
Traditional programs such as unemployment
insurance and welfare have experienced only modest
success in addressing the economic self-sufficiency
needs of the low-income and unemployed populations. A
new approach to these problems is essential.
Entrepreneurial training and self-employment
programs are operating throughout Western Europe and
the Third World. They assume a variety of forms and
serve diverse groups of individuals. Program services
range from providing financial assistance (often in the
form of transfer payments) to offerings of
entrepreneurial training. Groups assisted range from
peasant women to skilled laborers. While some of these
programs operate within economies vastly different from
that of the United States, all have shown varying
degrees of success in aiding low-income and unemployed

people attain economic independence through small
business development. Some analysts have criticized
these programs for aiding individuals who could have
succeeded without government intervention, while others
argue that self-employment must be not only allowed but
also encouraged as an option for those dependent on
transfer payments.
In the United States, a large number of
entrepreneurial training and self-employment programs
targeting low-income and unemployed persons have been
started in the last few years. In both the public and
private sectors, these programs provide technical
assistance and training, financial assistance, and a
range of other support services. While none of these
programs has existed long enough for definitive
evaluation, early evidence indicates that certain
characteristics greatly contribute to the success of
participants. New programs are taking into account
these traits and the need for thorough program
To address the continuing changes of the U.S.
economy, the fluctuating demand for labor within local
economies, and the continuing decreases in support from
the federal government, state and local governments
have been forced to examine new options for meeting the
needs of low-income and unemployed persons. A program
that allows recipients to invest transfer payments in

entrepreneurial training and self-employment
potentially may address the goal of economic
independence for these target groups and, with
successful small business development, generate
additional jobs for local economies.
Chapter two begins the analysis of the
feasibility of self-employment as a means towards
economic self-sufficiency for transfer payment
recipients. The examination includes: changes in the
economy since World War'll; traditional approaches to
the problems of poverty and unemployment; the concept
of transfer payment investment; the theory of the
entrepreneur and entrepreneurial activity; analysis of
the formal and informal sector and the dual labor
market; the growth and job generation potential of
small businesses; problems confronted by small business
owners and employees; the criticisms and justifications
of a transfer payment investment policy to promote
small business development by low-income and unemployed
persons; and the role of self-employment in economic
growth and development.
Chapter three provides a study of
entrepreneurial training and self-employment programs
in other countries. Existing program evaluation data
is presented and lessons for the United States are

Chapter four examines existing self-employment
programs in the United States. The chapter categorizes
existing programs into three distinctive types,
identifies common characteristics of successful
programs, discusses program evaluation, examines
typical participant characteristics, types of
businesses launched, and the recommended evaluation
parameters for new program design.
The appendix provides a unique compendium of
over 70 entrepreneurial training and self-employment
programs operating throughout the world.

The Changing U.S. Economy
Structural changes in the U.S. economy are
calling renewed attention to the problems of the
unemployed and low-income members of the population.
Changes in the demand for labor, especially in the
manufacturing and service sectors, have led to an
increase in what economists call "mismatch" problems:
the inability of the labor market to match
appropriately skilled workers with available jobs.
Many have argued that the solution cannot be left to
market forces because of existing imperfections in the
labor and capital markets (i.e., the market does not
behave in a textbook manner) but must be addressed by
government intervention. The government's past
approaches to these problems have included transfer
payments, employment and training programs, and job
generation and creation programs.
This chapter examines first the structural
changes in the U.S. economy and traditional forms of
government intervention. It then explores a new

strategy for dealing with the growing mismatch and
structural unemployment problem: transfer payment
investment. The examination of the strategy involves
exploring theories related to entrepreneurship, formal
and informal sector relationship, dual labor markets,
small business growth and job generation, and economic
growth and economic development.
The changing structure of the economy has
generated a great deal of discussion among both
policymakers and economists. The primary reason
offered for increases in unemployment since World War
II is the shifting emphasis from the manufacturing
sector to the service sector. According to labor
economists Marshall, Briggs, and King, "Throughout the
post-World War II era, each successive period of
economic prosperity in the United States left a residue
of higher levels of unemployment."1 This constantly
increasing unemployment has resulted from a number of
economic changes, including increased automation,
changes in consumer tastes, a substantial increase in
the size of the labor force, and the export of jobs by
U.S. corporations to foreign plants.
Automation, the "substitution of machinery for
human sensory, thought, and control processes" greatly
decreased the demand for unskilled labor.2 Changes in
consumer tastes in the four decades since World War II
also have affected the labor force. As the economy

grew and the availability of durable goods expanded,
consumers began to desire increased services, and "as
expenditure patterns change, so do employment patterns
because the demand for workers is derived from the
demand for goods and services."3 In addition to
automation and changing consumer tastes, this period
also experienced drastic changes in labor force
participation rates. The number of workers in the
labor force expanded dramatically from the late 1960s
through the early 1980s as the post-World War II baby
boom generation reached working age. This period also
saw a huge increase in the number of women entering the
labor force.4 These activities significantly and
permanently changed the structure of the U.S. economy
and the labor force.
Proponents of classical economic theory argue
that changes in the U.S. economy and the labor force
such as those just described will establish a new
equilibrium given sufficient time. As Martyn Duffy has
In each labour market, firms are creating jobs
and trying to recruit employees to fill vacancies.
The labour force consists of employed and
unemployed workers, several of whom are trying to
find jobs. The flow of new hires into employment
results from the successful matching of job
vacancies with acceptable job seekers and the
acceptance of a job offer.
Unfortunately for U.S. employers and workers,
the process of matching job vacancies with
appropriately skilled workers is extremely difficult.

The complexity of the U.S. economy and the extensive
geographical area of this country prohibit the
successful completion of this function. To reach this
goal, every worker and every employer would have to
know what types of jobs are available, which workers
with which skills are looking for employment, and the
location of both the available workers and the jobs.
These conditions (i.e. the assumptions of perfect
information and perfect mobility of the factors of
production) simply do not exist. It is difficult at
best for an out-of-work person in one region of the
United States to learn of employment opportunities in
another region. In addition to this knowledge, worker
mobility is severely limited by factors external to
labor market activity.
The failure of the labor market to adjust to
structural changes in recent decades has increased
unemployment levels. Statistics show that the number
of people out of work for more than six months was 33
percent higher in June 1984 than in April 1980.
Average length of unemployment increased from 11.3
weeks to 18.6 weeks over the same period. While the
official jobless rate in September 1988 was 5.4
percent, structural unemployment as a result of
. . 7 .
economic changes persists. Evidence of continuing
structural unemployment is implied through increased in
the so-called natural rate of unemployment. The

phenomenon of structural unemployment is defined as
continuing involuntary joblessness, which exists when
unemployment has been reduced by public policy as much
as possible without causing unacceptable rates of
inflation.8 Although the seriousness of the problem of
structural unemployment in the United States varies
from one study to the next, an estimated 100,000 to
three million American workers have been dislocated
from their jobs by structural changes.9
While structural unemployment is not unusual,
policymakers may have cause to be concerned. Some
amount of structural unemployment is common in an
economy as large and diverse as that of the United
States due to the mismatch problem previously
described. What should cause policymakers concern is
the time required by the economy to adjust to such
extensive changes. As Richard Lipsey has pointed out,
There is little doubt that the price system
could be used to reduce the impact of structural
problems. It is quite another thing, however, to
assert that the price system could solve all, or
even the majority, of structural problems over an
acceptable span of time.10
Structural changes in the economy also present
problems to employers. Given the increasing rate of
structural unemployment in recent years, there is
reason to believe that "unless something is done to
prepare the worker for available jobs the jobs will not
be filled, or if filled, the work will be done in an
inefficient manner."11 The case for an active labor

market policy to reduce structural unemployment is
Labor Market Policy
Labor market policy can take many forms but
consists generally of job generation and creation
programs to increase the demand for labor; employment
training or education programs to increase the quality
of the labor force; and/or transfer payments (i.e.,
payments made by the government, usually to an
individual or family, for which no good or service is
received in return).
The primary problem cited in discussions of
these programs- is the so-called displacement effect.
It is argued that for every job created by a government
program, a worker in the private sector is displaced.
Other problems include: competition created by the
products or services produced by the subsidized workers
with similar products or services produced by
unsubsidized workers; the use of public funds to
subsidize these workers that could have been used for
other purposes (i.e., helping existing businesses); and
the belief that many of the subsidized workers would
have found employment without the program. It is
important, therefore, to include not only the new jobs
created but also the possible jobs eliminated when
calculating the net impact of job creation programs.

Given the number of possible displacement
problems, job creation programs appear to be a poor
strategy for dealing with structural unemployment.
However, evaluations of "job creation programs which
are tightly targeted at disadvantaged workers (the
structurally unemployed) are much less costly methods
of creating additional employment than are untargeted
programs.1,13 The displacement effects of job creation
programs seem to be a problem more of program design or
focus rather than a fundamental flaw in program
A complementary strategy to job creation
programs are programs that work toward increasing the
skills and knowledge of the labor force. The
accelerating change of the economy from manufacturing
to services requires workers to possess very different
skills, which implies "an expanding role for
occupational training and retraining."14
Employment training and educational programs,
the most traditional of all the types of labor market
policy,15 have been used for years to address the
problems of unemployment and underemployment.
Employment training programs have taken numerous forms,
the most prevalent being: classroom training, on-the-
job training, apprenticeships, and job shadowing.
Training programs have been lauded not only for the
effect they have on the human capital of unemployed

workers (i.e., increases in workers' general levels of
education, experience, and skills) but also for their
cost-effectiveness. As Harold Wilensky has stated:
If we had to choose the one policy cluster that
is most cost-effective it would be training and
placement. . Job training comes closest to
simultaneously achieving equality . and
efficiency. . Even if training programs do not
fit immediately available jobs, they may reduce
long-term unemployment and increase adaptability. .
. Training and placement programs have
considerably reduced unemployment.16
The third major area of labor market policy is
much less active than job creation or job training
programs. In the transfer payment program, checks
simply are mailed out to people based upon means-
testing (i.e., their level of household income) or
previous contributions to a central fund. (The federal
Aid to Families with Dependent Children (AFDC) and
state General Assistance programs are means-tested,
while unemployment insurance benefits are the result of
previous worker and employer payroll contributions.)
Originally, transfer payment programs were designed "to
provide temporary income to a small fraction of the
population during brief spells of joblessness."17
Program designers believed that the economy would
provide a sufficient number of jobs for anyone who
wanted employment and that any involuntary unemployment
would be short term. Statistics show that the
necessity to make payments to "a small fraction of the
population" is a myth. Based on cash income, the

number of people living in poverty increased nearly 30
percent between 1979 and 1984. 18 It is estimated that
the vast majority of these people experience
"temporary" poverty. Only an estimated 2.6 percent of
the population is defined as experiencing long-term
poverty, (i.e. eight of ten years). However, "'a
little over one-half'" of those persons living in
poverty in one year remain in poverty the next year.
Despite the fact that only a very small percentage of
people persist in poverty for many years, if over one-
half of this population remains in poverty in excess of
one year this hardly fits the definition of "a small
fraction of the population during brief bouts of
Transfer Payment Investment
Three major forms of labor market policy,
discussed above, have been used with varying degrees of
success to address the problem of long-term, structural
unemployment in America. These policies have been
implemented frequently in isolation from one another.
Because little coordination among programs has existed,
training recipients of transfer payments for placement
in job creation programs rarely has been a reality.
The possibility for such a coordinated effort exists in
the form of "transfer payment investment" policy.

Transfer payment investment (TPI) "refers to a
set of policies and programs designed to . enable
and encourage transfer recipients to invest their
benefits towards the achievement of greater levels of
economic self-sufficiency."4U The achievement of self-
sufficiency through TPI has been approached in three
distinct ways. The first twogrant diversion (i.e.,
using an individual's benefits to pay for employment
training) and wage subsidieshave been implemented by
several states to reduce the number of involuntarily
unemployed people.
The third strategy and the focus of this
report, is the use of TPI for entrepreneurial training
and starting a small business. The public sector has
not used this method of dealing with the long-term,
structurally unemployed low-income population
extensively in this country. Seemingly successful
programs of this type, however, have been implemented
overseas. (See descriptions of foreign programs,
especially those of France and the United Kingdom, in
the Appendix.)
Using TPI for entrepreneurial training and
small business start-up offers the opportunity to
combine in a single strategy the three traditional
approaches to addressing the needs of the long-term
recipient of transfer payments. The individual
recipient could receive the necessary training and

assistance to start his or her own business, using
transfer payments as seed or working capital. Not only
would the individual recipient/"entrepreneur" be
creating employment for him or herself, but the
potential would exist for the employment of additional
Entrepreneurial Activity
The idea of launching transfer payment
recipients into the business world as "entrepreneurs"
raises a number of serious concerns and questions. The
following sections address the concerns most frequently
First, it is necessary to examine what it means
to be an entrepreneur. Besides the fact that
entrepreneur is a recent buzz word among economic
development specialists and policymakers, the term has
a specific definition within the field of economics.
The most famous and popular definition is attributed to
Joseph Schumpeter. He said that the role of the
entrepreneur is
to reform or revolutionize the pattern of
production by exploiting an invention ... an
untried technological possibility for producing a
new commodity or producing an old one in a new way,
by opening up a new source of supply of materials
or a new outlet for products by reorganizing an
In other words, the entrepreneur is an innovator, an
inventor, someone who does something in an entirely new

way. An individual who is willing to be creative, to
take risks, and to lead or to direct others in a
productive process.
The effect of entrepreneurial activity within
the U.S. economy is profound. According to Schumpeter,
entrepreneurship "is primarily responsible for the
recurrent 'prosperities' that revolutionize the
economic organism and the recurrent 'recessions' that
are due to the disequilibrating impact of the new
products or methods." Schumpeter found the
activities of entrepreneurs to be the primary
motivating force within a growing, active economy. The
defining characteristics of entrepreneurship and the
significance of such activity raise questions
concerning the appropriateness and feasibility of so-
called entrepreneurial training programs to improve the
economic status of low-income and unemployed
populations. Is it possible to teach someone how to be
an entrepreneur? Can characteristics such as risk-
taking, initiative, and leadership be developed outside
the marketplace? Many researchers have argued not only
that this is a possibility but also that these
conditions do exist and should be a focus of government
Regarding the possibility of training
individuals to be entrepreneurs, Albert Shapero has
argued that "entrepreneurs are npt born, they are

developed. The great majority of people are capable of
being made more entrepreneurial.And Steven Balkin
has stated that "many low income people . have very
good intuitive business reasoning skills picked up from
the streets."24 Balkin also has observed that perhaps
it is not necessary for low-income persons to become
entrepreneurs to improve their economic status. He
makes a significant distinction between
entrepreneurship and self-employment and advocates the
latter for low-income individuals. Self-employment, he
argues, can both increase income for the individual and
decrease prices, thus improving market conditions for
consumers. Balkin states, "The entrepreneur . .
receives economic profit. ... A self-employed person
is merely one who works directly for the market rather
than for the firm which intermediates between labor and
consumers." This process results in a general
improvement in marketplace conditions because
by labor selling directly to the customer . .
they [the self-employed] can reap part of that
[economic] profit. Thus labor increases its
income. The consumer can also take part [of the
economic profits] through lower prices, and
therefore stimulate demand."25
Through the development of self-employment, individuals
sell their labor directly to the marketplace, thereby,
eliminating or at least reducing the traditional
exploitation of labor by those who employ labor, and
potentially increasing labor's income through gaining
the surplus value that has traditionally gone to

employers. In addition, Schumpeter's requirement of
major innovation, calls into question the idea of
"teaching" someone to be an entrepreneur. Successful
self-employment as a result of creativity and adequate
support seems a more likely outcome. (The term self-
employment will be used to mean the anticipated outcome
of program participation. I will use the terms
entrepreneurial training and self-employment to
describe programs despite the somewhat inaccurate usage
of entrepreneur in this context.)
Formal vs. informal Sector
There is another branch of economic theory, (as
well as theorists in other social science fields),
which questions seriously the "chances for success"
offered low-income and unemployed individuals through
entrepreneurial training and self-employment programs.
Theorists of this school argue that there exist a dual
structure in the economy. They define this dualism in
the form of "formal" and "informal" labor markets. The
formal sector is described as that part of the economy
characterized by employment opportunities which offer
advancement potential, institutionalized grievance
procedures, and legally regulated wage and benefit
standards. The informal sector briefly can be defined
as the antithesis of the formal sector. The analysis
developed from examinations of the economies and labor

markets in the Third World, and has become an important
element within development literature. Only recently
has this framework been applied to developed economies.
Many argue that most individuals who "successfully"
complete such programs and start their own small
businesses would be operating almost exclusively within
the informal sector. This argument is based on a
definition of the informal sector as being "the sum
total of income-producing activities in which members
of a household engage, excluding income from
contractual and legally regulated employment."26 This
definition allows for the inclusion of a number of
employment activities: "direct subsistence production,
non-contractual wage employment, and independent
business ventures in industry, services, and
commerce."27 Given this definition of the informal
sector, and the stated goal of entrepreneurial training
and self-employment programs to launch individuals in
their own small, (frequently one-person) operations, it
is obvious that the majority will operate within the
informal sector.
Some public-policy analysts and policymakers
would respond to this observation with "so-what! As
long as these people are supporting themselves and are
off the public dole that's an improvement." Further
examination of the informal sector and it relationship

to the formal sector is required to answer this
According to several theorists, the
relationship between the formal and informal sectors
must be examined in political as well as economic
terms. It has been argued that the informal sector is
dependent upon "institutionalized state practices that
reflect the history of class struggles."^0 Victor E.
Tokman of the International Labour Office has defined
the dependency of the informal sector more explicitly.
He states that
dependency . operates both on the sources
of supply and markets for its [the informal
sector's] products, as well as on prices. Prices
of purchases are generally higher because they can
only buy small quantities and they do not have
access to credit facilities, while the prices for
its products, mostly services, are lower because of
the market they depend on. In both cases prices
tend to be fixed and markets are controlled outside
the sector."29
The dependency of the informal sector on formal
sector operations can inhibit the growth potential of
informal sector enterprises. The rationale for
supporting entrepreneurial training and self-employment
programs is based largely upon the belief that at least
some of the individuals who successfully complete these
programs will earn not only sufficient income to
support themselves and their families but that their
businesses will grow and provide employment
opportunities for others. Informal sector theorists
argue that the potential for growth (defined as the

accumulation of capital) by enterprises in this sector
is severely limited by their subordinate relationship
to the formal sector. Caroline Moser argues (as well
as other authors, e.g. Portes; Tokman) that for firms
in the informal sector constraints on growth
include an overwhelming degree of dependence
upon capitalist industry for the provision of
essential raw materials and basic equipment, lack
of access to sophisticated technology, and lack of
access both to banks and private credit facilities
and to the personal relations which constitute the
long-term prerequisites for the acquisition of
credit and contracts. Constraints such as these
limit their ability to harness productive forces
and to evolve relations of production commensurate
with the accumulation of capital.30
Despite these prohibitive constraints to the
growth of enterprises in the informal sector, the
"success" of some small number of firms is not
precluded. Policymakers and analysts are reminded,
however, that the
prosperity of informal entrepreneurs is
based ... on the continuing plight of their own
employees. Unprotected workers at the bottom of
the labor market . subsidize the will-being of
their immediate employers as well as the
profitability of the formal firms on which those
employers depend." 31
A spectrum of conclusions can be drawn based on
the analysis of the informal sector and its dependent
relationship to the formal sector. It has been
suggested that supporting the development of informal
sector enterprises provides an opportunity to assist
"'the poor without any major threat to the rich', a
potential compromise between pressures for the

redistribution of income and wealth and the desire for
stability on the part of economic and political
elites." Others argue that enterprises operating
within the informal sector offer their owners little
more than "a means of survival at the margins of the
OO , , ,
modern economy." A third interpretation states that
given the dependency of the informal sector on formal
sector enterprises, public policies designed to assist
the informal sector tend to result in the promotion of
firms in the formal sector. As a result it is argued
that "only fundamental changes in the overall political
and economic structure" will improve the lifestyle and
"economic status" of individuals within the informal
sector.34 None of the offered outcomes of policies to
promote informal sector growth offer much hope of
improving the living conditions of the low-income or
unemployed through self-employment. Given the
improbability of "fundamental changes" in the U.S.
economy in the near future, however, it can be argued
that in the absence of such changes and employment
opportunities in the formal sector, self-employment in
the informal sector can offer, for a few, a level of
income above that provided by government transfer
Thus, if some low-income and unemployed
individuals can improve their income level at least
marginally through self-employment then it is necessary

to examine the view of other theorists regarding the
role of small business within the U.S. economy.
Small Business Growth and Job Generation
Entrepreneurship and small business ownership
always have been an integral part of the American
economy. In recent years, however, entrepreneurial
activity seems to be on the rise. One author described
the activity of the 1970s and early 1980s as the period
of "the rediscovery of the entrepreneur." In the
seven-year period between 1972 and 1979, self-
employment increased by 25 percent.35 Small business
growth and job generation have been the focus of
numerous studies, the most frequently cited being those
of David Birch of the Massachusetts Institute of
Technology (MIT) and Catherine Armington and Marjorie
Odle of the Brookings Institution. In his 1979 study
of the job generation process, Birch observed that
firms with 20 or fewer employees generated two-thirds
O ZT #
of all the new jobs between 1960 and 1976. Armington
and Odle examined private sector employment for the
years 1978 through 1980 and found an increase of 8.7
percent over the period, with approximately 78 percent
of this growth occurring in businesses of 100 or fewer
employees. They found that while these firms account
for only 49 percent of the total employment of the
labor force in the private sector, they generate almost

80 percent of new jobs.37 These two studies have
provided convincing evidence that small businesses
generate the majority of new jobs in the economy.
Whether or not these are permanent jobs,
neither study addresses. Birch, however, does state
that over a seven year period, small firms, (those with
20 or fewer employees) face a very high probability of
failure, are more likely to "die" than contract in size
but if they survive are "four times more likely" to
expand than are larger firms.
If spurring the growth and establishment of
small businesses is to be an interventionist policy on
behalf of low-income people, it also is necessary to
examine the job generation abilities of small firms by
age, region, and industry characteristics. First, does
a young, small firm generate jobs? According to Birch,
"Young firms . generat[e] about 80 percent of all
replacement jobs [i.e. jobs to replace those lost
through business closures or contractions]....
[Furthermore,] this pattern holds across all sectors of
, IQ #
the economy and across all regions." Can small firms
that locate in low-growth regions of the country
generate jobs? It has been argued that small
businesses located in slow-growing regions generate a
disproportionate share of net new jobs. Statistics
cited by Armington and Odle show that over the three-
year period from 1978 to 1980 small firms generated 77

percent of all new jobs but accounted for only 37
percent of total employment in low-growth areas.40
New, small businesses contribute to job
creation, and small businesses in distressed areas
create a sizable number of jobs, but are the job-
generation abilities of the firms affected by a rural
versus an urban location? Frank Swain, chief counsel
for advocacy of the U.S. Small Business Administration,
defining a small business as one having fewer than 100
employees, has stated that between 1976 and 1984 small
businesses located in rural areas generated 56 percent
of the jobs created, while small firms in urban areas
created 61 percent of new jobs over the same eight-year
period.41 Evidence shows that even when examined by
age or location, small businesses generate the majority
of net new jobs within the economy.
There is, however, a difference in small
business job generation by industry. Jobs created by
small businesses in the service and retail and
wholesale trade industries are significantly more
numerous than in the manufacturing sector. As one study
of small business growth in Philadelphia reveals, "More
than half of the net gain in jobs occurr[ed] in the
service sector." When combined with wholesale and
retail trade, the three sectors account for over 80
percent of the net new jobs created by small
businesses.42 This evidence shows that

the job generating firm tends to be small. It
tends to be dynamic (or unstable, depending on your
viewpoint), the kind of firm that banks feel very
uncomfortable about. It tends to be young. In
short, the firms that can and do generate the most
jobs are the ones that are the most difficult to
reach through conventional policy initiatives.43
Self-employment training, perhaps with the use
of TPI for the low-income and unemployed could be a
policy initiative that would address the needs of these
potentially job-generating, yet fledgling small
Given the potential to train low-income people
in the skills of self-employment and the proven ability
of small businesses to generate jobs, a method to
combine these results to ease the financial and other
difficulties of low-income individuals, operating
primarily in the informal sector, should be examined.
Balkin suggests three types of public policy to achieve
this goal: first "remove governmental impediments .
. [second, design programs] that actively seek low-
income clients and generate micro-enterprises . .
[and, third, establish] institutional creations that
can nurture and sustain micro-enterprises once
created."44 The latter two are concerns being
addressed by a number of private and public sector
programs that have been developed within the last few
years to assist low-income people through the provision
of technical assistance, financial assistance and
support services,in establishing their own businesses.

(The Appendix describes over 70 such programs both in
the United States and abroad.)
With regard to the constraints of "governmental
impediments" on the low-income self-employed one
particularly irksome and easily correctable problem is
"a welfare rule that . considers capital equipment
purchases as earned income."45 Only low-income welfare
recipients are subject to this constraint in opening a
business. The Internal Revenue Service allows higher-
income people to deduct the depreciation on such
equipment from their personal income or business taxes.
Low-income people are faced with immediate income
reduction if they attempt to launch an enterprise that
could result in economic self-sufficiency.
Lack of Access to Capital
Another constraint often cited is lack of
access to capital. Many critics of self-employment
training programs for low-income people argue that
higher-income people wanting to start or expand a
business frequently are unable to obtain the necessary
financing from conventional lenders. If these people,
viewed as much lower risks than low-income people,
cannot obtain financing, critics argue that it is
ridiculous to believe that welfare recipients could
obtain enough money to launch a successful small
business. In some situations, the critics may prove to

be accurate. In general, however, the types of
businesses started by transfer payment recipients tend
to be one-person, labor-intensive informal sector
operations. While some of these businesses will grow
and meet with the same capital availability problems
faced by small businesses started by higher-income
individuals, most will remain so-called micro-
enterprises that employ the owner and perhaps one or
two other persons. Thus, the capital needed to launch
a micro-enterprise, given its nature of being labor
intensive, will be very limited.46
It has been argued that self-employment
training and small business start-up may not generate
sufficient income to allow the individual entrepreneurs
to leave the welfare roles. Balkin counters this
argument by stating that even if transfer payments
still are required after business start-up, it is an
improvement if the individual's income has increased.
He argues that some programs "may just have the effect
of helping the welfare poor become the working poor .
. [and] that . is an improvement."47 It is
certainly an improvement any time the income of a
transfer payment recipient is increased and especially
if the individual's "marketability" is improved through
the experiences gained by starting and operating his or
her own business. Without self-employment programs
being part of a comprehensive approach, significant

improvements in the lives of low-income individuals
will be difficult to accomplish.
Criticisms of TPI
A number of criticisms of the concept of
transfer payment investment for entrepreneurial
training and micro-enterprise start-up have been made.
Some of these criticisms have been referred to in the
previous sections, and will be dealt with more
thoroughly in the next section of this report. Critics
primarily are concerned with the issues of
imperfections in the capital market; "creaming" of
program participants; and the types of jobs created by
new, small businesses.
Small business problems with capital markets,
while already briefly discussed, require a more
thorough examination. Roger Vaughan and Robert Pollard
have stated that an essential element of any
entrepreneurial strategy is to make sure that an
economy's capital markets function efficiently. Such
efficiency is characterized by the direction of capital
toward new projects with the highest expected rate of
return. Unfortunately, according to these writers,
"Taxes and regulations imposed by both the federal and
the state governments distort the operation of capital
markets and discourage investments in riskier projects-
-many of which are new enterprises and new products."

As a result of these distortions and the resulting
imperfections in the capital markets, small businesses
often are unable to obtain the financing they need to
not only survive but also thrive.
Much to the distress of small firms, government
regulations are not the only constraint upon their
access to financing. Other problems arise from the
nature of the firms themselves. It has been noted
that, in general, the "'smaller the firm, the larger
the proportionate increase in [its] capital base
required to respond to an increase in demand but the
lower its ability to command loan and equity
finance'."49 If a micro-enterprise is successful in
terms of generating demand for its product or service,
then its ability to obtain financing to expand
production and meet market demand are extremely limited
due to its present size. The firm faces a proverbial
"Catch-22" dilemma: It cannot receive financing to
grow because it is too small.
The problems facing the small firm in the
capital market are not completely one-sided. Small
businesses are extremely risky. Financiers argue that
"the risks to the lender . are not proportional to
the size of the loan."50 These problems are the result
of the absence of one of the necessary assumptions for
the perfect operation of capital markets: perfect
information. Because perfect information does not

exist within these markets, it is impossible for
capital to flow to the investments that offer the
highest rate of return. As a result of this
imperfection, "banks may totally avoid lending to
specific groups unless they have information that
enables them to sort out each borrower and charge
appropriate interest rate levels according to each
borrower's riskiness so that they ensure themselves of
a profitable expected return."51
Obtaining conventional debt financing is, at
best, difficult for small businesses. Lawrence Litvak
has argued that conventional debt financing is not
optimal for small businesses in their first few years
of operation. He recommends the development of equity
financing (i.e., "capital in exchange for a share in
the firm's future income").52 The development of
equity capital markets could result in a more
efficient, perhaps more equitable allocation of
capital. It would be available to borrowers for whom
imperfect information is a constraint to conventional
debt financing.53
While the availability of equity finance would
improve the efficiency of capital markets, some doubt
exists about whether the problems of small business
actually could be eased by this type of financing.
This time the problem lies not with imperfect
information but with the small business owners

themselves. Harrison and Mason have observed that "the
notorious reluctance of small firm owner-managers to
surrender equity in return for a perceived loss of
independence, control and freedom of action, acts as a
significant barrier between the supply of and demand
for capital."54 Many believe these problems in the
capital markets will forestall any real long-term
success from a policy of TPI-financed entrepreneurial
training and small business start-up.
Existing entrepreneurial training and self-
employment programs often are criticized for their
perceived "creaming" of program participants. Creaming
is a process by which program administrators select
those participants most highly qualified and thus most
likely to succeed and, critics say, those most likely
to succeed in the marketplace without government
assistance. Eli Ginzberg has stated that "creaming is
likely to result in the expenditure of large sums for
relatively small social gains."55 The complaint often
is heard that government intervention programs result
in helping those individuals who, in the absence of the
program, would have found jobs or started businesses on
their own. Critics thus conclude that the net social
costs of such programs greatly outweigh the social
The "problem" of creaming in training programs
has not gone unanswered. Barbara Berman has argued

that retraining may have a multiplier effect upon the
economy as a whole. Such an effect occurs when the
actions of one person reverberate or multiply
throughout the economy. She states that:
since retraining one person subtracts one from
the unskilled labor force and adds one to the
skilled, . retraining . will enable the
economy to expand . and cause additional hiring
efiCUL <_>J1 tlllip-LUylUtiJIL .
There may be legitimate concern that government
programs are selecting the most qualified candidates
for training and not targeting the truly disadvantaged.
If Berman is correct, however, this may prove not
entirely contrary to the mission and goals of
government intervention in the long run.
programs pertains to the type of jobs created by micro-
enterprises. The owner of these businesses on average
tends to work more hours and earn less money than his
or her wage-earning counterpart. According to Balkin,
the average work week for self-employed individuals in
1983 was 40 hours, while wage earners worked an average
of 38 hours. Additionally, he estimates that one-third
of self-employed individuals worked a minimum of 49
hours each week. In terms of income, the difference
between self-employed and other workers is even more
dramatic. In 1982, the self-employed earned about 70
percent of the average income earned by wage-earning
workers.57 (Findings which lend support to the
A third major critique of TPI self-employment

formal/informal sector analysis discussed above.) This
lower level of income for self-employed individuals
may be offset somewhat if they receive personal
satisfaction from working for themselves and running
their own business. And if these businesses grow, what
is the quality of the additional jobs they generate?
"Some economists have claimed that even if small
businesses are effective in creating new jobs, the jobs
they create are inferior to those generated by big
businessesthey pay lower wages, offer fewer fringe
benefits, offer little upward mobility, and are
unstable."58 At least one survey proves the validity
of these critiques. In a survey conducted by the
National Federation of Independent Businesses, it was
determined that of firms with gross sales of less than
$50,000, only 15 percent offered employees health
The vast majority of these new businesses
operate in the informal sector. Firms started by
transfer payment recipients tend to cluster in the
services, retail trade, and light manufacturing
industries. Employment opportunities in firms of these
types are precisely what Richard. Edwards defines as
characterizing the secondary market or casual labor. u
Jobs within the secondary market are described as
"dead-end." Employment opportunities are characterized
as offering; little or no chance for advancement, low

compensation, no benefits, little reward for education
or experience, and arbitrary or personality-based
hiring and firing. Given the types of businesses
started to date by participants of self-employment
programs (see discussion of types of businesses in
chapter four) it is anticipated that the majority of
employment opportunities created for individuals other
than the owner/manager will have the characteristics of
the secondary labor market. Few of these businesses
will created jobs that offer security and advancement.
In addition to the questionable quality of jobs
generated by micro-entrepreneurs, critics also point
out that a justification for government intervention is
that low-income unemployed persons will not only start
new firms but also, when their businesses grow, fill
the new jobs with other unemployed persons. Based on
their study, "Targeting Employment Opportunities Toward
Selected Workers," William Gillis and Ron Shaffer found
that of new jobs generated in nonmetropolitan areas,
only a small fraction were filled by persons who were
previously unemployed.61 Based upon this evidence,
critics are deeply concerned about the ability of a
self-employment strategy to address the needs of the
low-income unemployed population.

Justifications for TPI
A TPI policy, to promote entrepreneurial
training and the establishment of small businesses, has
the potential to accomplish several policy objectives
with a single strategy. Since World War II, the U.S.
economy has undergone significant structural changes
resulting in the displacement of a large number of
workers and decreasing the chances of long-term,
transfer payment recipients to enter the labor force
because of rapid changes in marketable skills.
Traditional approaches to the problems of low-income
unemployed persons have included direct job creation,
employment training, and income maintenance through
transfer payments.
A public policy to encourage entrepreneurship
would offer the following advantages:
1) It encourages diversification, so local
economies do not become dependent on a single firm
or industry; 2) existing state residents are not
forced to bear the direct and indirect costs of
subsidies to recruit or retain industry from
outside the state; [and] 3) entrepreneurs and their
backers, and not the community at large, bear the
risk of failure. 2
In addition to meeting society's goals and the
advantages to the local community cited above, a policy
of TPI to promote self-employment could result in
positive benefits for the program participants. As
Vaughan and Pollard have stated, "Starting a new
business is risky, and a majority of new enterprises

ultimately fail. But failure is not the same thing as
waste. Competition is a learning process, and each
failure provides a lesson."63 Thus, even if a
participant's business should fail, it is argued that
the experience gained and human capital developed will
improve his or her chances for self-sufficiency.
Further, such an endeavor can increase the individual's
chances of obtaining other work. Balkin points out
that people who close their businesses generally do so
because they have found a better opportunity rather
than closing due to business failure. If Balkin is
correct, then these business closures represent
rational economic decision making on the part of the
self-employed. Such a decision, implies that the
individual has gained knowledge of a better opportunity
for economic advancement and is pursuing that
opportunity. He notes that the newly self-employed,
develop new contacts with other business owners and
such contacts often lead to work opportunities that are
more profitable and stable than small business
ownership. Thus, even if program participants close
their businesses after only a short period, the
training involved and the experience and contacts
gained from even a short stint of self-employment can
potentially improve the individual's chances for
attaining employment in the formal sector and some
degree of economic self-sufficiency.

Economic Growth and Economic Development
The Role of Self-Emplovment
One final question remains to be addressed: Do
programs that promote sel ^employment and small
business development by low-income and unemployed
people promote economic growth, economic development or
both? To answer this question, it is necessary to
define the terms growth and development. Public policy
tends to use these terms interchangably, however an
examination of the development literature provides an
important distinction. According to E. Bradford Burns
of UCLA "growth indicates simply and solely numerical
accumulation and in no way indicates how it occurred or
whom, if anyone, it benefited.1,65 Burns also provides
a definition of development. He states "development .
. signifies the maximum use of a nation's potential
for the greatest benefit of the largest number of
inhabitants. Development can imply or include growth,
although it is conceivable that a nation can develop
without growing."00
It seems equally conceivable that an economy
can grow without developing. Ideally, to benefit a
nation's entire populace, development should be tied to
growth. Three examples of this activity in the U.S.
come to mind. Government has a role in distributing
the benefits of growth to promote development.
Government fulfills this role through social services

and transfer payments. Private philanthropists attempt
to tie development to growth through monetary donations
to individuals and social service organizations.
Observation, of government land philanthropists in these
activities, implies their intent to have a "moralizing"
influence within a capitalist economy. Such moralizing
activities, while supporting the status quo, act as an
appeasement mechanism for those who live and work on
the economy's periphery. Limited monetary assistance
is provided but no significant empowerment results.
The third example of an entity which strives to link
development to growth is labor unions. Unions may be
the only organizations which genuinely link the growth
of corporations to development and empowerment for
their members.
With these definitions and examples in mind, it
is now possible to determine if self-employment
programs can provide a similar function to that of
labor unions, for the low-income and unemployed persons
they serve. As discussed in the informal/formal sector
analysis above, the new firms created by self-
employment programs will probably contribute to growth
in the formal sector while operating in the informal
sector. This growth will occur through the provision
of goods and services by these new firms to workers in
the formal sector at lower prices than are currently
available. In the long-run, formal sector firms will

be able to reduce the wages paid to workers because of
the availability of these lower priced goods and
services. The so-called labor reproduction cost has
been lowered. Capitalists are thus enabled to reduce
wages and increase surplus value extraction. It is
apparent based upon informal sector theory that self-
employment programs will promote growth within the
formal sector.
Development resulting from these programs,
however, is highly questionable. Individuals who
participate in self-employment programs are likely to
operate their businesses within the informal sector.
One of the characteristics of businesses in the
informal sector, cited above, is the limited
availability of capital and severe restrictions to
capital accumulation. Owner/managers therefore will
experience few, if any, of the development advantages
available from the growth they are promoting in the
formal sector. Employees of these new firms are
unlikely to benefit given their secondary labor market
status and the unprotected nature of their employment.
Self-employment programs, while providing
another market activity option to low-income and
unemployed persons and potentially contributing to
growth in the formal sector will not impact the
economic status quo and will fail to promote economic

1. Ray Marshall et al., Labor Economics:
Wages. Employment. Trade Unionism, and Public Policy
(Homewood, Ill: Richard D. Irwin, Inc., 1984), p. 613
2. Ibid. p. 614.
3. Ibid. p. 614.
4. Ibid. p. 615.
5. Martyn H. Duffy, "The Relationship Between
Unemployment and Unfilled Vacancies in Great Britain:
An Extended Job-Search, Labour Turnover View," Bulletin
of Economic Research 36, no. 2 (November 1984): 146.
6. Paula Duggan and Virginia Mayer, The New
American Unemployment: Appropriate Government Responses
to Structural Dislocation (Washington, D.C.: Northeast-
Midwest Institute: The Center for Regional Policy,
1985), p. 9.
7. "Economic and Financial Indicators," The
Economist. 309, no. 7574 (Oct. 29, 1988): 107.
8. Marc Bendick, Jr., "Employment and Training
Programs to Reduce Structural Unemployment," Statement
before the Joint Economic Committee of the United
States Congress, September 16, 1983.
9. Richard Corrigan and Rochelle L. Stanfield,
"Casualties of Change," National Journal 16, no. 6
(February 11, 1984): 252.
10. Richard G. Lipsey, "Structural and
Deficient-Demand Unemployment Reconsidered," in
Employment Policy and the Labor Market, ed. Arthur M.
Ross (Berkeley: University of California Press, 1965),
pp. 211-212.
11. Marshall et al
Labor Economics, pp. 613-

12. Robert H. Haveman and Daniel H. Saks,
"Transatlantic Lessons for Employment and Training
Policy," Industrial Relations 24, no. 1 (Winter 1985):
13. Laurie J. Bassi, "Evaluating Alternative
Job Creation Strategies," Economic Inquiry 23, no. 4
(October 1985): 671-672.
14. Bernard Casey and Gert Bruche, "Active
Labor Market Policy: An International Overview,"
Industrial Relations 24, no. 1 (Winter 1985): 45.
15. Ibid., p. 46.
16. Harold L. Wilensky, "Nothing Fails Like
Success: The Evaluation-Research Industry and Labor
Market Policy," Industrial Relations 24, no. 1 (Winter
1985): 4-5.
17. Meriwether Jones, Transfer Payment
Investment: An Overview (Washington, D.C.:
Corporation for Enterprise Development, n.d.) p. 1.
18. Ruth Sidel, Who Are the Poor?. Penauin
Press, 1986 . pp. 10-11.
19. Ibid. p. 12
20. Ibid.
21. Joseph A. Schumpeter, Capitalism,
Socialism. and Democracy (New York: Harper and
Brothers, 1950), p. 132.
22. Ibid.
23. Albert Shapero, "The Entrepreneurial
Event," in The Environment for Entrepreneurship, ed.
Calvin A. Kent (Lexington, Mass.: D.C. Heath and
Company, 1984), p. 28.
24. Steven Balkin, Self-Emplovment for Low
Income People: A Report to the National Commission on
Jobs and Small Business (Chicago: June 1986), p. 4.
25. Ibid., pp. 5 and 9.
26. Alejandro Portes, "The Informal Sector:
Definition, controversy, and Relation to National
Development" Review VII no. 1 (Summer 1983): 159.

/ 44
28. Ibid. p. 168.
29. Victor E. Tokman, "An Exploration into the
Nature of Informal Formal Sector Relationships" World
Development VI 9/10 (Sept./Oct. 1978): np.
30. Caroline O. N. Moser, "Informal Sector or
Petty Commodity Production: Dualism or Dependence in
Urban Development?" World Development VI 9/10
(Sept./Oct. 1978): 1059.
31. Alejandro Portes and Saskia Sassen-Koob,
"Making it Underground: Comparative Material on the
Informal Sector in Western Market Economies", American
Journal of Sociology 93 no. 1 (July 1987): 40.
32. Ray Bromley, "Introduction The Urban
Informal Sector: Why is it Worth Discussing?" World
Development 6, no. 9/10 (1978): 1036.
33. Portes and Sassen-Koob, "Making it
Underground" p. 36.
34. Moser, "Informal Sector or Petty Commodity
Production" p. 1062
35. Calvin A. Kent, "The Rediscovery of the
Entrepreneur," in The Environment for Entrepreneurship,
ed. Calvin A. Kent (Lexington, Mass.: D.C. Heath and
Company, 1984), p. 1.
36. David Birch, The Job Generation Process
(Cambridge, Mass.: M.I.T. Program on Neighborhood and
Regional Change, 1979), p. 8.
37. Catherine Armington and Marjorie Odle,
"Small BusinessHow Many Jobs?," The Brookings Review.
Winter 1982, p. 14.
38. Birch, The Job Generation Process, p. 1.
39. Ibid. p. 1.
40. Roger J. Vaughan and Robert Pollard,
"Small Business and Economic Development" in Financing
Economic Development in the 1980s: Issues and Trends,
eds. Norman Walzer and David L. Chicoine (New York:
Praeger, 1986), pp. 125-126.
41. Frank S. Swain, Chief Counsel for
Advocacy, U.S. Small Business Administration, Statement
before the Subcommittee on the Rural Economy and Family
Farming, Committee on Small Business, United States
Senate, March 5, 1987.

42. Kenneth McLennan and Paul Seidenstat, New
Businesses and Urban Employment Opportunities
(Lexington, Mass.: D.C. Heath and Company, 1972), p.
43. Birch. The Job Generation Process, o. 17
44. Steven Balkin. Self-Emplovment for Low-
Income Peopl e (New York: Praeger Press, forthcoming),
p. 97.
45. Ibid., p. 104.
46. Ibid., p. 122.
47. Ibid., p. 8.
48. Vaughan and Pollard, "Small Business and
Economic Development," pp. 133-134.
49. Richard T. Harrison and Colin M. Mason,
"The Regional Impact of the Small Firms Loan Guarantee
Scheme in the United Kingdom," Regional Studies 20, no.
6 (December 1986): 536.
509. Ibid., p. 537.
51. Yoon Je Cho, "Inefficiencies from
Financial Liberalization in the Absence of Well-
Functioning Equity Markets." Journal of Money. Credit
and Banking 28, no. 2 (May 1986): 197.
52. Lawrence Litvak, "Why Capital Markets Do
Not Work Effectively for Small Businesses," The
Entrepreneurial Economy 1, no. 2 (August 1982): 3.
53. Cho, "Inefficiencies from Financial
Liberalization," p. 198.
54. Harrison and Mason, "The Regional Impact,"
p. 537.
55. Eli Ginzberg, "Overview: The $64 Billion
Innovation," in Employing the Unemployed, ed. Eli
Ginzberg (New York: Basic Books, Inc., 1980), p. 17.
56. Barbara R. Berman, "Alternative Measures
of Structural Unemployment," in Employment Policy and
the Labor Market, ed. Arthur Ross (Berkeley: University
of California Press, 1965), pp. 259-260.
57. Balkin, Self-Emplovment. p. 23.

58. Vaughan and Pollard, "Small Business and
Economic Development," p. 126.
59. Ibid., pp. 126-127.
60. Richard Edwards, Contested TerrainThe
Transformation of the Workplace in the Twentieth
Century. (New York: Basic Books, Inc., 1979),p. 167.
61. William R. Gillis and Ron E. Shaffer,
"Targeting Employment Opportunities Toward Selected
Workers," Land Economics 61, no. 4 (November 1985):
62. Vaughan and Pollard, "Small Business and
Economic Development," p. 132.
63. Ibid., pp. 136-137.
64. Steven Balkin, "Self-Employment Assistance
Programs in the United States Targeted to Low
Income/Disadvantaged People" (Paper Delivered at the
Fortieth Annual Meeting of the Industrial Relations
Research Association, December 29, 1987 at Chicago,
Illinois), p. 2.
65. E. Bradford Burns, Latin AmericaA
Concise Interpretative History. (Englewood Cliffs, New
Jersey: Prentice-Hall, Inc., 1977), p. 91.
66. Ibid., p. 92.

Self-employment programs are operating in many
countries around the world. These programs benefit
individuals from a variety of social and economic
strata. Programs vary from providing financial
assistance to landless peasants in Bangladesh to
helping "redundant" skilled and unskilled workers in
the United Kingdom start their own businesses. The
majority of these programs are operated by the
countries' national governments. Most of them began as
small, usually locally or regionally based, pilot
projects that then were expanded throughout the
country. (Descriptions of several programs in Western
Europe and the Third World are presented in the
For the purposes of this study, the most
important programs to examine are located in Canada,
France, and the United Kingdom. Two organizations, one
in the public sector and one in the private sector, are
operating self-employment training programs in Canada.
The Ontario Social Development Council (OSDC) operates
the public sector effort. OSDC's programs, established

in January 1987, offer women training and assistance
for self-employment. The second Canadian organization
providing training is a private consulting firm. The
company provides its services to "employment
disadvantaged groups." Since 1985, the firm has worked
with more than 100 participants in five different
locations. Successful program completion, defined as
starting a business or finding a job, has been
accomplished by 55 to 85 percent of the participants.
The French program, Chomeurs Createurs
d'Enterprises, has been in operation since December
1979. It uses transfer payment investment by providing
unemployed workers with a lump sum payment roughly
equivalent to 10 months worth of unemployment benefits
to use as seed capital for starting a business. An
estimated 60 percent to 80 percent of these new
businesses survive the first year. If the business
fails, the individual may receive benefits once again,
but the lump sum payment must be repaid within five
years through higher unemployment insurance
The Enterprise Allowance Scheme (EAS) in the
United Kingdom also uses transfer payment investment.
Unemployed workers who want to start their own business
can continue to receive a weekly allowance roughly
equivalent to their unemployment benefits for up to one
year while they start the firm. The program has

existed since 1982, and more than half of the new
businesses still were operating after three years.
Entrepreneurial training and self-employment
programs in other countries are fairly new.
Consequently, little formal program evaluation has been
completed. The U.K.'s Enterprise Allowance Scheme has
been evaluated, however, and is probably the most
relevant program for U.S. policymakers to examine. The
EAS program has been evaluated by the Manpower Services
Commission at both the 15-month and the 18-month
stages. Additionally, a Department of Employment pilot
program also was evaluated at the 18-month stage.1 The
18-month evaluation was conducted by surveying a sample
of 1,300 program participants who were enrolled in EAS
in March and April 1984. Of this sample, 60 percent
completed and returned the survey.
The survey results estimate that 76 percent of
the businesses that completed the scheme still were
operating six months after leaving the program.
According to Barbara Thomas of the Manpower Services
Commission, "Over half of the people who start on the
scheme are likely to be trading three years later (that
is two years after we stop paying the allowance)."2
The survey shows that these businesses are doing more
than just surviving. An increasing number of the new

businesses are providing decent incomes to their
proprietors. The evaluation completed at 15 months
showed 42 percent of the businesses with "gross weekly
takings in excess of 200 pounds." By the time of the
18-month survey, this number had increased to 52
percent of surviving businesses. It is important to
keep in mind that 200 pounds weekly is five times the
40-pound allowance participants received during their
enrollment in the scheme.
Another important factor examined in the
evaluation is job generation by the businesses started
by scheme participants. The survey found that "for
every 100 businesses set up with the aid of the
allowance, 91 new jobs have been generated. Of these,
37 are full-time and 54 are part-time."4 It should be
noted, however, that these job-generation rates are
made possible by a small number of the surviving firms.
respondents employing more than one full-time
or part-time worker number seven percent and nine
percent respectively. . [Only] one percent of
survivors generated a quarter of all additional
employment [and] these same one percent account for
all enterprises employing ten or more people.
Thus, the evaluation shows that while a large
proportion of the businesses are surviving and are
generating gross weekly takings five times the
allowance for the proprietors, few of the new firms are
contributing to a growth in employment opportunities.

With regard to the proprietors of nonsurviving
firms, some 20 percent went directly into paid
employment. Of this group, two-thirds "had an income
in excess of the enterprise allowance." Only 10
percent had incomes less than the allowance, and
another 10 percent had incomes in excess of 200 pounds
per week.6 These findings suggest that there is a
contribution made to human capital by participating in
the scheme. Either these individuals who found
employment increased their skills and their
marketability through their short-lived self-
employment, or they increased their personal and work-
related contacts, thus opening more employment
opportunities, or both.
Survey results show that "both survivors and
non-survivors . would have liked more information
on marketing, bookkeeping and obtaining finance."7
Two frequently cited criticisms of programs
like EAS are 1) that the participants who succeed would
have done so without the program, and 2) that the
businesses started by such programs force businesses
started without similar help out of the market. The
survey estimated the impact of both the "deadweight"
and "displacement" effects. "Deadweight in the first
year ... is estimated at 45 percent of entrants.
Displacement ... is estimated at around 50 percent."
According to Thomas, if the impact of these two effects

is combined with "other factors such as job generation
it is estimated that for every 100 entrants on to EAS,
unemployment falls by 35 during the period for which
the allowance is paid."8 Program administrators feel
that these early results show that EAS is a success.
In the words of Thomas, "The doubters have been proved
In addition to the success of the businesses
started, Thomas cites two factors as being responsible
for the overall success of EAS. The first factor is
marketing. The EAS program has been marketed actively
to the public with the result that an estimated "77
percent of the total potential client group in Great
Britain is aware of the scheme's existence." The other
factor is program cost: "At no point in the five years
of the programme's existence have the running costs
exceeded five percent of the total programme
budgets."10 In fact, the "British government estimates
that additional tax receipts will more than compensate
for the cost of the program within 2 1/2 years."
It is important to keep in mind that however
successful EAS may be, the self-employment option is
not an answer for the entire unemployed and welfare-
dependent population. It has been estimated that
"about two percent of Britain's unemployed have joined
the [EAS] program."12 Although this is indeed a small
percentage, it represents several thousand individuals

with a new option in their struggle for economic
The French program, Chomeurs Createurs,
unfortunately, has not been evaluated as extensively as
EAS. Some surprising results have surfaced, however.
In an April 1988 article, Rona Feit cites, "A recent
regional evaluation of the program show[ed] that the
unemployed, with fewer options (those less skilled and
poorer) had lower business failure rates."13 If this
finding can be repeated both in France and in other
programs, critics who claim these programs cream off
the best clients for assistance while screening out
those lesser qualified will be proven wrong. Another
surprising observation of the French program is that it
"accounted for a third of all new French companies in
1983." 14 Obviously, the program is having a
significant impact on small business start-up and self-
employment hopefuls.
Lessons for the United States
The self-employment programs of the United
Kingdom and France offer a number of lessons for U.S.
policymakers and program administrators. The
evaluations conducted on both of these programs provide
a great deal of valuable data for the United States.
The interpretation of evaluation results, however, is
highly subjective. Two recent studies conducted by

Marc Bendick, Jr., and Mary Lou Egan of Bendick and
Egan Economic Consultants, Inc., and by the Corporation
for Enterprise Development (CfED) examine data from the
evaluations of the French and United Kingdom's programs
and reach opposite conclusions. Following are
summaries of the lessons drawn by these two studies.
The study conducted by Bendick and Egan found
that enterprise development as a means of addressing
the employment problems of low-income and unemployed
populations to be dubious at best. Bendick and Egan
found that the self-employment option is not meaningful
for "the severely disadvantaged, the long-term
unemployed, or young job seekers with little prior work
experience."15 They determined that the self-
employment option is no more, and perhaps less,
accessible to these client groups as is wage and salary
employment. Bendick and Egan observed that those
individuals who have succeeded in launching self-
employment ventures have "substantial skills and
capabilities." It is their assessment that self-
employment requires "the same prerequisites as regular
employment and additional ones as well."
Another caution issued by these two authors
pertains to the types of businesses started by transfer
payment recipients. Bendick and Egan are concerned
that businesses started by individuals with few skills
and chronic unemployment problems will start firms

highly dependent on their local community. Dependence
on the local economy can be a source of problems for
both new firms and established small businesses. The
authors explain that if self-employment is used as a
policy option for low-income persons or for persons
living in economically depressed communities, the new
firms have a poor chance of surviving. The predicted
failure is due to the fact that
the communities in which these prospective
entrepreneurs reside tend to share their problems
of high unemployment and low income. Their local
markets thus offer relatively limited demand for
the goods and services which the firms offer. . .
The odds of business success are reduced.17
A second problem created by new firms is that
they tend to be in the service and retail sales
industries, and there is a "tendency . [for] new
firms to compete against and displace existing firms in
1 O , ,
the same local markets.,,xo Summarizing these
criticisms, Bendick and Egan state that new firms
"which have the highest prerequisites in terms of
proprietor's credentials and initial capitalization and
least dependence on local markets . are least
likely to be started by recipients of transfer
In addition to their concerns about the types
of businesses that program participants start, Bendick
and Egan also are suspicious of the types of
individuals who enter the programs. These authors
charge that both EAS and Chomeurs Createurs cream their

client groups for the individuals best qualified and
most likely to succeed. They cite statistics showing
that in relation to the entire unemployed population,
the participants in both programs "underrepresent"
women, workers under age 25 and over age 55, and the
long-term unemployed. Their statistics show a
"disproportionate representation of managerial,
professional, and skilled workers."20
Bendick and Egan reach rather discouraging
conclusions concerning the potential of self-employment
programs to address adequately the needs of transfer
payment-dependent populations. They conclude that the
businesses resulting from such programs "are modest in
terms of proprietor incomes." They also are concerned
about the appropriateness of self-employment programs
for these special populations. It is their assessment
that the "prerequisites for successful self-employment
are found at the lowest rate among those hardest to
place in regular employment."21 In meeting the goal of
generating employment, Bendick and Egan find that
programs that promote self-employment fall short. They
state that "transfer payment diversion plays at most a
contributory role . [because] it expends most of
its resources on generating increases in the number of
new business starts, most of which are not likely to
contribute substantially to aggregate job growth."22

Concluding their study, they present what they
consider the fundamental flaw of self-employment
programs for transfer payment recipients. They argue
that a single program cannot meet both the goals of its
participants and the goal of job generation. They
assert that "programs face a trade off between economic
objectives and social ones. They can maximize the
extent to which they serve those hardest to employ, or
they can maximize business survival, profitability, and
employment generation."23 Bendick and Egan view self-
employment programs for transfer payment-dependent
individuals to be highly speculative in terms of
success and a dubious use of public funds and energies.
In its study of programs in the United Kingdom
and France, the Corporation for Enterprise Development
reaches different conclusions and offers opposing
lessons to those advanced by Bendick and Egan. CfED
finds hope and new opportunities for economic self-
sufficiency in these programs. It is CfED's view that
Europe's many entrepreneurial training and
outreach programs are mitigating the risks of
starting a business and reducing failure rates of
new enterprises. By offering entrepreneurs the
tools they need to survive and grow, these programs
are also encouraging business ownership among those
not traditionally considered capable of
CfED argues that providing a self-employment
option to transfer payment recipients offers them the
potential to move from dependence to independence.
CfED maintains that offering this opportunity rather

than just providing a payment to raise income just
above the poverty level is a significant improvement in
social policy. It states that "these schemes actually
'invest' in the unemployed to create jobs that
otherwise wouldn't exist. In so doing, they are
transforming the safety net into a ladder."25
According to CfED, these types of programs assist
individuals in escaping transfer payment dependence
rather than simply maintaining individuals at a very
low income level, as the traditional programs do.
Another of CfED's conclusions reminds
policymakers and program administrators to refrain from
viewing self-employment as a solution for all dependent
populations. They assert that while such programs can
assist a significant portion of the unemployed gain
economic self-sufficiency, "expectations . must be
realistic" and self-employment must be viewed as
"another option" within a broad realm of social
policies.26 Despite this caution, CfED maintains that
one overriding feature that makes enterprise
development so attractive a strategy in both Europe
and the U.S. is its potential to help achieve two
important national objectives simultaneously:
enhance overall national economic growth, while at
the same time, assist people and communities in
greatest need.27
The final lesson offered by CfED is an
observation: "The British and French programs do

appear to have borne the burden of proof that here is
... O O
an idea deserving of experimentation m the U.S."
Both studies were conducted by individuals who
consult on economic development issues and public
policy. Both used data from evaluations of operating
self-employment programs in France and the United
Kingdom. Despite these similarities, the studies reach
opposing conclusions. The importance of recognizing
the subjectivity of the interpretation of evaluation
data cannot be overstressed. One final example from
each of these studies will emphasize this point. Both
studies examined the 18-month evaluation of the United
Kingdom's Enterprise Allowance Scheme. Based upon this
evaluation, Bendick and Egan state that "about 50
percent of business starts would have occurred without
OQ #
program assistance." ^ CfED points out that "half of
the EAS participants say they would not have started an
enterprise without the scheme." Disregarding the
fact that the numbers are somewhat suspect because they
are based upon what participants say they would or
would not have done in the absence of the program, one
must be aware of the subjectivity of such studies and
their use of statistics.
These two studies may indicate the problems
incurred when evaluation is conducted by organizations
dependent upon corporations and philanthropic
foundations for project funding. Given the limited

availability of funds and the biases of funding
agencies, program evaluators have been cautious about
identifying their theoretical basis of analysis and
personal biases. The authors of these two studies are
no different. Both express a genuine interest in the
problem of poverty. The conclusions they reach
different only in emphasis. Based on their in-depth
analysis of the statistics generated by the program
evaluators, Bendick and Egan recognize that structural
changes are reguired to truly assist the low-income and
unemployed. They conclude that in the absence of such
changes, some transfer payment dependent people could
succeed at self-employment but others,who fail, will
suffer psychological costs. A CfED also recognizes,
from its review of the evaluation statistics and visits
to the program sites, that self-employment is not a
cure for poverty but supports the development of such a
policy out of pragmatism. Their position is that if a
few people can succeed than it is worth developing a
program to assist them.32
The conclusions offered by both studies have
validity. While structural changes indeed are
necessary before any significant advances can be made
toward the reduction of poverty, given the slow nature
of change in the United States, if self-employment
programs can assist some low-income and unemployed
people it should be an available option.

1. David Allen, Enterprise Allowance Scheme
EvaluationFirst Eighteen MonthsNational Survey
(England: Manpower Services Commission, 1987), n.p.
2. Barbara Thomas, "The Enterprise Allowance
SchemeA Radical Alternative to Unemployment"
(Presentation, "Expanding Entrepreneurial Opportunity:
An Alternate Route to Self-Sufficiency," Conference of
the National Governors Association/Corporation for
Enterprise Development, Washington, D.C., June 17,
3. Allen, Enterprise Allowance Scheme
Evaluation. p. 6.
4. Ibid., n.p.
5. Ibid., p. 5.
6. Ibid., n.p.
7. Ibid., p. 9.
8. p. 11. Thomas , "The Enterprise Allowance Scheme
9. Ibid., p. 3.
10. Ibid., pp. 4-5.
11. Corporation for Enterprise Development,
Eight Lessons from Europe (Washington, D.C.:
Corporation for Enterprise Development, 1984), p. 19.
12. Carol Steinbach, "Europeans Are Giving
Unemployed an Opportunity to Become Entrepreneurs,"
National Journal 17, no. 10 (March 9, 1985): 527.
13. Rona F. Feit, "Updates on Industrialized
Nation Self-Employment Programs," Economic Development
Abroad 3 (April 15, 1988): A4.
14. Paul Lewis, "Europeans Try to Reduce
Unemployment or Make It Pay," The New York Times. March
31, 1985, n.p.

15. Marc Bendick, Jr. Transfer Payment Diversion for , and Mary Lou Egan, Small Business
Development: British and French Experience.
Unpublished paper, Washington, D.C., August 1986, p
16. Ibid.
17. Ibid., p. 21.
18. Ibid., p. 22.
19. Ibid., pp. 45-46.
20. Ibid., pp. 8 and 13.
21. Ibid., p. 1.
22. Ibid., p. 46.
23. Ibid., p. 34.
24. Corporation for Enterprise Development
Eight Lessons, o. 3.
25. Ibid., p. 15.
26. Ibid., p. 5.
27. Ibid., p. 62.
28. Ibid., p. 21.
29. Bendick and Egan, Transfer Payment
Diversion, r i. 13.
30. Corporation for Enterprise Development
Eight Lessons, p. 18.
31. Bendick and Egan, Transfer Payment
Diversion, c i. 46.
32. Corporation for Enterprise Development,
Eight Lessons, p. 66.

This chapter examines entrepreneurial training
and self-employment assistance programs operating in
the public and private sectors of the United States.
The discussion includes the categorization of programs,
the identification of "ideal" program characteristics,
the status of program evaluation, and the composition
of "ideal" evaluation parameters.
Types of Programs
The more than 60 programs in the United States
that were examined for this chapter can be sorted into
three general categories based upon program
characteristics: training and technical assistance
programs, financial assistance programs, and
miscellaneous programs.
Programs offering training or technical
assistance, or both, comprise the largest group.
Individual programs in this category are arrayed by
their characteristics in Table 1. (Some of the
programs overlap categories and also are placed in
Table 2.) This category of programs offers low-income

Program Name/ Individual Business Course Work/ Internships Tech.Asst./ Target
Location Counseling Plans Classroom Training Group
HETADI Hawaii X X socially deprived & ethnic minorities
Illinois X X low-income & unemployed
Transitions Maine X X X X displaced homemakers
AFDC Entrepreneurship Program Maryland X AFDC recipients
Self-Employment Initiative Mississippi X X AFDC recipients
EDIT Ohio X X X dislocated workers
NCRVE Ohio X X X X dislocated workers
Bowling Green Ohio X X X dislocated workers
Piqua Ohio X X X dislocated workers
Hillsboro Ohio X X X X dislocated workers
Zanesville Ohio X X X dislocated workers
Washington X X X X X dislocated workers
Unemployment Insur. Self-Employment Demo. Project Washington X X unemployed
West Virginia X X AFDC recipients

Table 1 (Continued)
Program Name/
Individual Business Course Work/ Internships
Counseling Plans Classroom
Wisconsin X X low-income 1 chronically unemployed
San Francisco X Renaissance Entrepreneurship Ctr. Cali forni a X X unemployed
Contra Costa County California X high school students & out-of-school youth/adults
Women & Employment, X Inc. West Virginia X . X low-income women
Ganados del Valle New Mexico X low-income
Mississippi Action for Community Education, Inc. Mississippi X X low-income women
Chicagoland Enterprise Ctr. Illinois X low-income S minority
Community & Economic Development Assn. Illinois X X X low-income
Self-Employment Program Washington, D.C. X X low-income
Women's Economic X Development Corp. Minnesota X X unemployed & underemployed women
Micro Industry X Credit Organization Arizona X low-income entrepreneurs
Worker-Owned Network Ohio X unemployed

Program Name/
Table 1 (Continued)
Individual Business Course Work/ Internships Tech.Asst./ Target
Counseling Plans Classroom Training Group
Project DOVES Maine X welfare- dependent women
Coastal Enterprises, Inc. Maine X low-income
Human Enterprise X Development Group, Inc. Indiana X X displaced workers
Women's Assn, for Women's Alternatives Pennsylvania X X X unemployed S underemployed women
HUB Program for Women's Enterprise Connecticut X X X X low-income women
HUB Program for Women's Enterprise New Jersey X low-income women
Lane Community College Oregon X X X X dislocated \ structurally unemployed
Niagara Community College New York X X structurally unemployed
Project RISE Florida X X X X X unemployed
New Jobs, Inc. Pennsylvania X low-income minority & women
Women's Business Initiative Corp. Wisconsin X X X low-income women
Illinois Central College Illinois X X low-income & unemployed
Black Hawk College Illinois X X low-Income 5 unemployed

Program Name/
Table 1 (Continued)
Individual Business Course Work/ Internships Tech.Asst./
Counseling Plans Classroom Training
Women's Self- Employment Project Illinois
Illinois CPA Society 111inois X
Latin American Chamber of Commerce Illinois
Minority Economic Resources Corp. Illinois X
Chicago State Univ. Illinois X
Community Renewal Society Illinois
Self-Employment Investment Demo. (IA,Ml,MN,MS,NJ,NY) X
Be Your Own Boss Florida X
Center for Enterprise Development Illinois X
Neighbors at Work Illinois
Shorebank Corp. Illinois X X
unemployed J
low-income 1
low- and
women and
low- and
minority low-
and moderate-

Table 1 (Continued)
Program Name/ Location Individual Counseling Business Plans Course Work/ Classroom Internships Tech.Asst./ Training Target Group
Uptown Center Hull House Association Illinois X X low- moderate- and middle- income persons
Control Data Corp. X X X low-income and dislocated workers
Project I-CAN Indiana X X X low-income
Women's World Banking X low-income women
Entrepreneurial X Training & Guaranteed Placement Virginia X X X X low-income and r-yed

Program Name/ Provides Assist to Financial Plan/ Support Other Target
Location Financing Find Financing Cash Flow Groups Group
HETADI Hawaii X socially deprived & ethnic minorities
Hawaii Capital Loan Program Hawaii X low-income
Illinois X low-income & unemployed
Self-Employment Loan Program Iowa X X mentor low-income
Job Start Maine X low-income
Equity Participation Investment Program Maryland X X franchises low-income franchi sees
AFDC Entrepreneurship Program Maryland X child care AFDC recipients
Self-Employment Initiative Mississippi X X support services AFDC recipients
M/WBE Revolving Loan Fund New York X minority & women low- income entrepreneurs
Western New York Economic Development Corporation New York X incubator minority & women low- income entrepreneurs
New York Business Development Corp. New York X low-income entrepreneurs
EDIT Ohio X dislocated workers

Table 2 (Continued)
Program Name/ Provides Location Financing Assist to Find Financing Financial Plan/ Cash Flow Support Groups Other Target Group
NCRVE Ohio X follow-up dislocated workers
Bowling Green Ohio X X mentor dislocated workers
Piqua Ohio X dislocated workers
Vermont Job Start Vermont X low-income
West Virginia X X sales & marketing AFDC recipients
Wisconsin X X X incubator low-income 1 chronically unemployed
San Francisco Renaissance Entrepreneurship Ctr. California X unemployed
Women & Employment, Inc. West Virginia X low-income women
Ganados del Valle New Mexico X co-op low-income
Mississippi Action for Community Education, Inc. Mississippi X X X incubator low-income women
Community & Economic Development Assn. Illinois X X low-income
Self-Employment Program Washington, D.C. X low-income
Women's Economic Development Corp. Minnesota X X X X leasing unemployed & underemployed women

Program Name/
Table 2 (Continued)
Provides Assist to Financial Plan/ Support Other
Financing Find Financing Cash Flow Groups
Micro Industry X Credit Organization Arizona low-income entrepreneurs
Worker-Owned Network Ohio X unemployed
Project DOVES Maine X welfare- dependent women
Coastal Enterprises, X Inc. Maine X employ. training plan low-income
Women's Business Development Corp. Maine X mentor low-income women
Human Enterprise Development Group, Inc. Indiana X follow-up displaced workers
HUB Program for Women's Enterprise Connecticut X X low-income women
Lane Community X College small amt. Oregon X dislocated & structurally unemployed
New Jobs, Inc. Pennsylvania X low-income minority women
Women's Business X Initiative Corp. Wisconsin X X low-income women
Illinois Central College Illinois X X follow-up low-income & unemployed
Black Hawk College Illinois X X low-income & unemployed
Women's Self- X Employment Project Illinois X X follow-up unemployed & underemployed women

Program Name/
Table 2 (Continued)
Provides Assist to Financial Plan/ Support Other
Financing Find Financing Cash Flow Groups
Northeast Invest. X X minority women
Center/One and welfare
Illinois recipients
Shorebank Corp. X minority, low-
Illinois & moderate- income
Unemployment Insur. X unemployed
Self-Employment Demo. Project Washington
Minority Economic Resources Corp. 111i nois X low-income
HUB Program for Women's Enterprise New Jersey X low-income
Self-Employment X AFDC
Investment Demo. (1A,MI,MN,MS,NJ,NY) recipients
Uptown Center Hull X low-, moderate & middle-
House Association
Illinois income persons
Control Data Corp. X low-income & dislocated workers
Project I-CAN X low income
Indiana mentor
Women's World X X low-income
Banking women
Entrepreneurial X low-income
Training & marketing and unemployed
Guaranteed Placement plan &
Virginia follow-up

or unemployed clients a range of services including:
individual counseling; assistance in the preparation of
business plans; course work or classroom time;
internships; technical assistance; and training.
Existing programs vary in their delivery of services
from one to all of those listed above. Programs of
this type are offered by state governments, the private
sector, and community colleges and vary in their focus
with some targeting women, AFDC recipients, dislocated
workers, or minority groups, among others.
The second category of programs offers
financial assistance to low-income or unemployed self-
employment hopefuls. Programs in this group (arrayed
in Table 2) offer three different types of financial
assistance: direct provision of financing for the
business, assistance in obtaining financing, or cash
flow analysis for the new business. The most prevalent
of these three types is aid in locating financing.
These programs also are operated by a variety of
entities and target a wide range of individuals.
The third category is composed of an assortment
of programs that provide some type of assistance to
fledgling self-employment endeavors. Programs in this
category provide services such as mentors, aid in
obtaining franchises, child care, support services,
business incubator facilities, follow-up assistance,
sales and marketing assistance, aid in forming

cooperatives, equipment leasing arrangements, and
employment training plans. Programs in this category
are shown on Table 2.
While programs in the three categories vary
widely in emphasis, each strives to assist the self-
employed person attain economic self-sufficiency
through business development.
"Ideal11 program Characteristics
The examination of a variety of these programs
has led to a set of apparent "ideal" program
characteristics. To design a successful
entrepreneurial training or self-employment program, it
is essential that "specific, detailed objectives . .
be decided upon if one is to build an effective public
service organization.1,1 While this seems an obvious
step, the program objectives must be outlined carefully
and remembered throughout the program's design and
implementation, or the program surely will fail.
Another necessary step is to examine and evaluate
the services already available in the community
to provide education or technical assistance to
pre-start-up or current entrepreneurs, evidence of
the need for additional training or assistance, and
the potential community support for a comprehensive
program to serve such individuals.2
In a study conducted by the Ontario Social
Development Council of Ontario, Canada, evaluators
found that, for programs that target low-income women

(although many of these characteristics could apply to
other target groups)
successful programs . have had many of the
following characteristics:
o An active, 'informal' economy of part-time,
home-based, business activity;
o Many single-headed households;
o Insufficient and/or inadequate employment
o Inexpensive available space;
o Successful experience in developing partnerships
between the private and public sectors;
o A network of community members committed to the
success of women's self-employment;
o A range of business development services;
o The capacity to mobilize a variety of resources;
o The ability to reach and attract low-income
women and women from diverse cultural backgrounds;
o A responsive financial community, or the
likelihood of attracting the participation of
responsive members of the financial community.
Examining a community for these characteristics is of
vital importance to the program's success.
Once it has been determined that sufficient
demand for a self-employment program exists and that
such a program should be implemented, a number of
important characteristics should be included. In its
study of self-employment programs, the Illinois Office
of Urban Assistance within the state Department of
Commerce and Community Affairs states that
operators of successful entrepreneurship
programs in the United States have found that there
are five distinct and important phases to include
in the comprehensive delivery of new business
creation and entrepreneurship programs:
recruitment . screening . business
management training . start-up assistance . .
[and] ongoing community support and follow-up.4

In addition to these programmatic
recommendations, the Ontario Social Development Council
has outlined the necessary components for an effective
training program. The council recommends that the
content of a training program should include:
introduction to small business and self-employment,
personal resume development and description of the
business idea, market research, market plan, legal and
insurance requirements of a business, financial
planning, applying for a loan, dealing with the details
of operations, and actual business start-up.5 Overall,
the "ideal self-employment program should: target a
specific client group; provide perspective participants
with a rigorous orientation of the realities of self-
employment and small business ownership; remain
flexible to the differing needs of participants rather
than predetermined outcomes; provide comprehensive
support services to participants; and of course,
provide participants with the skills necessary for
successful self-employment.
Designing and implementing an effective self-
employment program requires a great deal of planning,
research, and careful adherence to meeting the
program's objectives and the participant's needs. If,
however, each step can be designed with patience and
attention, the total program can affect the lives of
its participants significantly. More important, as

Daniel S. Kuennen and John E. Stapleford have stated,
"One of the most sound investments that government can
make is in the development of individuals7 human
Evaluation of Programs
To determine the viability of entrepreneurial
training and self-employment programs in assisting low-
income and unemployed individuals gain self-
sufficiency, extensive program evaluation is essential.
Unfortunately, little formal evaluation has been
completed to date. This is due primarily to the age of
existing programswith most of them being newonly
one to two years oldand with the "old and
established" programs being in existence only four to
five years. Some evaluation of short-term
demonstration programs, however, has been completed and
is reviewed here. (The next section discusses "ideal"
evaluation criteria and how to build in evaluation
parameters in new program design.)
Most of the evaluation completed to date has
focused on numbers: How many people started the
program, how many finished, how many actually started a
business, and how many remained in business for a given
time. In Ohio, seven self-employment pilot programs
were established to assist dislocated workers in
launching their own businesses. Each of the programs

was designed by the delivering agency and the Ohio Job
Training Partnership Act (JTPA) office. (The Appendix
contains full program descriptions.) While program
characteristics varied slightly, all operated with the
same objective: to assist dislocated workers in
becoming self-employed. The seven pilot programs
varied in the number of participants involved and the
number of businesses actually started. One program
assisted over 100 dislocated workers and helped launch
more than 60 new businesses. Another program was
terminated during the recruitment process. Of the
seven programs, six completed operations with
participants working in their own businesses.
In Washington state, a 14-month entrepreneurial
training pilot program was operated to address the
needs of dislocated workers. This project ended with
more than one-half of the participants running their
own businesses and about 25 percent finding paid
employment. The agency the state contracted to run the
program estimates that 70 percent of the new businesses
will survive.
In the private sector, HETADI (Hawaii
Entrepreneurship Training and Development Institute)
has worked with "socially deprived and ethnic
minorities" since 1977. This effort has resulted in 66
percent of the participants starting businesses and 52
percent surviving for two to four years.

Beyond these basic observations, it also is
important to examine more closely the individuals who
participate in these programs rather than just to state
simply that they are unemployed or low-income. Also of
importance is the types of businesses being started by
people in self-employment programs. Are their
businesses truly entrepreneurial activities, self-
employment or disguised wage work?
Program Participant Characteristics
The characteristics of participants of self-employment
programs, while of obvious importance are difficult to
obtain at this point in the development of such
programs. Very few programs have collected and allow
access to detailed participant profiles. When the data
has been collected, it is still of somewhat
questionable value because the programs have been
operating for such short periods of time. In addition,
the more established programs tend to provide services
exclusively to women thus the data is biased with
respect to the unemployed and low-income population as
a whole. The evaluation which follows is based upon
what limited data is currently available, and should be
read with the preceding concerns in mind. Five
programs provided some data on participant
characteristics, and will be examined individually.

In the almost five years, it has been operating
WEDCO has provided services to 3,200 women. Of this
number, 42 percent were just "researching an idea." As
of summer 1988, 644 women were operating their own
businesses. Based upon an application completed at the
time of entry in WEDCO's program participants exhibit
the following characteristics:
Income: 75% below $15,000
45% below $7,000
Age: 47% 30-39
24% 40-49
11% 50+
Employment: 17% Full-time
9% Part-time
26% Receiving unemployment
insurance, welfare,
38% Self-employed
Education: 1% no diploma or G.E.D.
34% have college degree
14% have advance degree
Race or ethnicity: 80% Caucasian
7% Black
4% Native American
1 % Asian7
Control Data
Using program wide data as of March 1987,(the
latest available) of 38 economically disadvantaged
participants 28 had started their own businesses. Of
72 dislocated workers 40 had started businesses and of
50 dislocated farmers, 40 were self-employed.

Approximately one-third of participants are women.
Dollar volume generated by the new businesses is:
4% $51,000-$100,000
13% $21,000- $50,000
83% $0- $20,000.8
Stia and Associates in Washington
This program worked exclusively with dislocated
steel and shipyard workers. Of the three classes held,
31 men and two women were "placed" in their own
businesses. Nineteen men and one woman were placed in
jobs, and ten men and one woman left the program
without placement. Of those placed in their own
Age: 20/s 1
30's 18
40's 10
50's 3q
60's l9
Information was available for 165 participants.
The program served dislocated workers exclusively.
Average age: 41
Gender: 68% Male 32% Female
Race: 96% White
Marital Status: 64.2% Marri 35.8% Singl
Home Ownership: 58%
Education: 13.3 years
Work Experience: 18.9 years

Length of Tenure: 10.2 years
Union Membership: 36%
Previous Wage: $8.95 hourly
$30,043 annually
Previous Job Title:
Time between displacement and training:
Start own Business: 27.5%
Accept employment: 41.6%10
Enterprise Allowance Scheme
Of those participants whose businesses were
"surviving" at the time of the 18-month evaluation,
characteristics are as follows:
Survivors: 15% women
Survival Rate: 78% for men
65% for women
Average Age: 39 years
Marital Status: 2/3 married or living as
Race: 4% ethnic minorities
Health: 8% have long-term health problems
Mean gross weekly takings: L574.54 (L207.94net)
Median gross weekly takings: L230
Few conclusions can be drawn from this data,
however it implies that the average participant is in
o\0 o\o o\o o\ o\ o\o

their 30's or 40's is more likely to be white and male,
have some education beyond high school and is likely to
have employment experience. If these characteristics
persist, the feasibility of self-employment as a means
of attaining some degree of economic self-sufficiency
for the long-term unemployed or welfare recipient, will
be highly questionable.
Types of Businesses Started
Participants of self-employment programs have
started a variety of businesses. Many of these
businesses are the direct result of hobbies and leisure
time activities. The vast majority of these businesses
are single-person operations.
started include:
Car repair
Lawn & Yard Service
Janitorial Service
Carpet Cleaning
Seamstress or Tailor
Public Accountant
Training Consultant
Examples of businesses
Custom Upholstery
Nail & Hair Care
Crafts & Gifts
Pest Control
Nutrition Consultant
Word Processing Service
Music Lessons & Classes
From the above examples it is apparent that
these new businesses fall into three industrial
categories: services, retail trade, and manufacturing,
using data from four representative programs (EAS,
WEDCO, Ohio JTPA and Stia in Washington) the percentage
of businesses started in the services industry ranges
from, 46% to over 60%.
The retail sector is second

ranging from 13% to 22% of the new businesses. And
manufacturing accounts for 14 to 18 percent.
It has been suggested that "entrepreneurship"
can be broken down into three distinct categories: 1)
disguised wage work; 2) self-employment; and 3) true
entrepreneurship (i.e. that which results in major
innovation). Businesses started by unemployed and low-
income individuals, as typified by the above examples,
cluster in the first two categories. It is the rare
exception that exhibits entrepreneurial activity. The
majority fall into the self-employment category. These
businesses exhibit the characteristics of the informal
sector. They are single-person operations with limited
access to capital and are highly dependent upon the
local economy.
Although the numbers generated by these
programs seem to imply that an impact is being made at
least for some individuals, the analysis as yet is
little more than a gesture toward needed comprehensive
program evaluation. The more difficult questions have
yet to be asked: Are these programs successfully
moving people from transfer payment dependence to self-
sufficiency through small business development over the
long term, or are program participants' businesses
failing after short periods of time with the owners
returning to poverty or just succeeding in gaining the
level of the working poor? Are self-employment

programs helping the long-term unemployed and welfare
dependent or only succeeding with those individuals who
face fewer barriers to steady labor market activity?
A four-year demonstration project focusing on
welfare-dependent women, organized by the Corporation
for Enterprise Development and five states, will
attempt to answer this question. The programs are
being implemented and operated in a deliberate fashion
and will be evaluated throughout the demonstration
period by the Manpower Demonstration Research
Corporation (MDRC). The importance of this particular
demonstration is not only that it will run for four
years and will provide support services to participants
but also that evaluation has been included in the
program design.
MDRC plans to conduct extensive evaluation of
the demonstration programs to "determine the
feasibility of operating self-employment and
entrepreneurial programs for low-income women" (This
section is based on the Research and Demonstration
Methodology section of the Minnesota Self Employment
Investment Programs waiver application to the Office of
Family Assistance, U.S. Department of Health and Human
A number of issues have been identified for
analysis. MDRC plans to examine the "scale of the
programs". This analysis will include: 1) the

geographic distribution of the population, public
assistance recipients, potential customers for new
businesses and potential service providers of self-
employment training; 2) local market conditions,
including income levels, industry strengths and
weaknesses, unemployment rates and the employment base;
3) availability of inexpensive space for new business
location; 4) the existence of other available
assistance programs; and 5) local public assistance
program characteristics.
In addition to program scale issues, MDRC's
evaluation also will examine participant
characteristics including education, welfare history,
personal and family debt, child care needs, literacy
and work history. Services also will be examined.
Service deliverer characteristics concerning training,
assistance and support services provided, time frames
of service delivery and flexibility will be analyzed.
Following program enrollment participants will
be questioned concerning their experiences during and
since program completion. Questions will include
business success, applicability of program skills to
business or employment, subsequent education or
training, and sources and level of income. Program
costs on a per person basis also will be calculated to
allow comparison with other welfare employment and
training programs. The evaluation will include, as

well, judgments concerning the most promising program
characteristics to allow for changes in programs to
better meet participant needs and program goals in both
existing and new programs. In addition to this
evaluation of program implementation, MDRC will
determine if a "full scale random assignment impact
analysis" is necessary and if the needed factors are
available for such an analysis.12
Based upon guidelines set down by the Joint
Committee on Standards for Education Evaluation in
their 1981 study, Standards for Evaluation of Education
Programs, Projects, and Materials, the evaluation plan
MDRC has designed meets the recommended criteria. The
evaluation will examine the programs goals and how (if)
these goals change and it recognizes the possibility of
unexpected consequences of the programs. Additionally
this evaluation will be what the Joint Committee terms
a formative evaluation. This type of evaluation is
conducted to allow for improvements in program design
and delivery of services and the development of model
program characteristics. With respect to communication
and utilization of evaluation results, MDRC plans
periodic meetings with the program operators to
communicate results and improvement ideas. Utilization
of results, however, as with any public assistance
program will depend greatly upon the state or
locality's political climate.

MDRC's evaluation plan is in accordance with
the guidelines of the Joint Committee despite the
absence of any evaluation of the types of businesses
started by program participants. The plan does include
an examination of participant earnings and business
viability but it does not address whether the
businesses result in self-employment, disguised wage
work or entrepreneurial activity or if the businesses
have any chance of escaping the confines of the
informal sector.13
"Ideal11 Evaluation Parameters
The importance of including evaluation
parameters cannot be overstated. Fred Doolittle of
MDRC recommends that policymakers use the following
seven guidelines for designing a self-employment
program so that the true impact of such a program can
be determined reliably:
1) Involve professional program evaluators
early in the design process;
2) Be realistic about time frames and the program's
likely size and effect;
3) Coordinate reporting requirements;
4) Remember policy issues when designing research
5) Remember program objectives when setting short-
run performance standards;
6) Think carefully about how to measure outcomes
versus impacts; and
7) Care about what the costs of the program are.14
If new programs are designed with evaluation in mind,
it should be possible to determine the feasibility of
using self-employment programs to help low-income and

unemployed persons or at least which sub-groups of this
population can escape transfer payment dependence and
achieve economic self-sufficiency through small
business development..

1. Daniel S. Kuennen and John E. Stapleford,
"Developing and Implementing Effective Entrepreneurship
Programs," in National Rural Entrepreneurship Symposium
(Knoxville, Tenn.: Southern Rural Development Center,
1987), p. 29.
2. Illinois Department of Commerce and
Community Affairs, Office of Urban Assistance,
Organizing Self-Employment Programs: A Guide for
Development Organizations (Springfield: Illinois
Department of Commerce and Community Affairs, March
1987), p. 3.
3. Ontario Social Development Council, Self-
Emplovment Training for Women. (Ontario: Ontario
Social Development Council: n.d.), pp. 2-3.
4. Illinois Department of Commerce and
Community Affairs, Organizing Self-Employment Programs,
pp. 3-4.
5. Ontario Social Development Council,
"Schedule and Outline for Self-Employment Training
Curriculum Development," program information flyer,
n.d., n.p.
6. Kuennen and Stapleford, "Developing and
Implementing Effective Entrepreneurship Programs," p.
7. Telephone interview with Pat Sandin of
WEDCO, October 1988..
8. Telephone interview with Michael Newman of
Control Data Corporation, October 1988.
9. Stia Systems and Associates, Final Report
on Entrepreneurial Training. June 1987, p. 31.
10. Stephen Magnum and Joann Keyton, A Review
of the JTPA Title III Entrepreneurial Training Pilot
Programs: Final Report. December 1986, p. 94.

11. David Allen, Enterprise Allowance Scheme
Evaluation First Eighteen Months National Survey.
January 1987, n.p.
12. Manpower Demonstration Research
Corporation, "Research and Demonstration Methodology"
section of Minnesota Self Employment Investment program
waiver application to Office of Family Assistance, U.S.
Department of Health and Human Services.
13. Joint Committee on Standards for Education
Evaluation, Standards for Evaluation of Education
Programs, Projects, and Materials. (New York: McGraw-
Hill, 1981) n.p.
14. Presentation of Fred Doolittle, Manpower
Demonstration Research Corporation given at
"Entrepreneurial Training and Self-Employment for the
Low-Income: The Emerging State Role," Conference of
the National Conference of State Legislatures, Chicago,
Illinois, April 14, 1988.

The structural changes occurring in the
nation's economy have affected state and local
economies significantly. State governments have been
faced with increasing long-term unemployment among
their citizens and, thus, a need to develop new
strategies for aiding low-income and unemployed
populations. Transfer payment investment potentially
could accomplish the policy goals of both job training
programs and job-generation efforts. Using transfer
payment investment to promote programs that assist
individuals in attaining self-employment through small
business development could accomplish these goals.
In pursuing a strategy of self-employment for
low-income and unemployed people, the following
conclusions can be drawn from an analysis of the
existing literature. The data indicate that for this
type of program, a multiyear demonstration would be
recommended. Early results from existing programs show
that a comprehensive approach (i.e., a program that
provides clients with a range of services from child
care and transportation to business plan development
and financial assistance) is the most successful. If

operated over a number of years, this program format
would allow for thorough program evaluation and
Program administrators and evaluators must be
realistic about outcomes and what constitutes success.
Self-employment is not the cure for poverty in the
United States. However, an individual who completes
such training and finds employment in the formal sector
rather than launching a business should not be
considered a failure in terms of program results.
There exist valid criticisms of self-employment
that policymakers and program administrators need to be
aware of when designing such programs and examining
their outcomes. Three criticisms are cited most
frequently. The first is based on older programs in
France and the United Kingdom that indicate only a
small percentage (2 percent to 3 percent) of the low-
income, unemployed, transfer payment-receiving
population will become involved in and succeed at small
business development. Critics claim that these numbers
show that such programs are assisting people who
probably would have succeeded in some capacity in the
marketplace without the program. A second criticism is
voiced within the small business community, which
argues that aiding this group is unfair competition to
those already in business since they made it on their
own and, thus, others should too. The third criticism