Do Micro-Entrepreneurship Programs Increase Wage-Work? Evidence from Chile

The Chilean government launched the “Micro-entrepreneurship Support Program” (MESP), Programa de Apoyo al Microemprendimiento (PAME) in Spanish, in 2006 to provide previously unemployed or underemployed individuals with the skills and capital required to generate income through self-employment. PAME included training as well as a cash transfer component. The training ran for four months and taught participants basic administrative and business planning skills. After completing the training, PAME offered participants about 300,000 CLP (US$600)approximately 4.5 times the monthly poverty linethat beneficiaries could spend on machinery, raw materials, or other inputs. PAME benefits about 24,000 individuals annually. To qualify, individuals must be over the age of 18, classified by the Chilean government as economically vulnerable, unemployed or have an unstable job, and must benefit from social security.

We partnered with the Chilean Ministry of Social Development to examine how combining business training with cash transfers impacts individual micro-entrepreneurs' employment and income. Additionally, to evaluate the effect of providing entrepreneurs with larger grants, researchers offered some PAME participants an additional transfer. Eligible individuals were randomly assigned to one of three groups:

1) Traditional MESP: individuals in this group were offered the traditional MESP program.
2) MESP-plus: individuals in this group received the same benefits as those in the Traditional MESP group but also received an additional 120,000 CLP (US$240) seven months after the end of the traditional MESP.
3) Comparison group: individuals in this group received nothing.

689 individuals were assigned to the regular PAME, 693 to the modified PAME with additional cash transfer, and 566 to the comparison group.

2010-10-01

2011-02-28

- Self-employment rates
- Employment rates
- Labor income
- Hours worked

The program “Micro-entrepreneurship Support Program” (MESP) is administered by the Chilean Ministry of Social Development and has more than 24,000 beneficiaries per year. MESP has two components: an in-kind transfer of start-up capital of about US$600 (approximately 4.5 times the monthly poverty line) and 60 hours of training over one month in effective business practices. In addition, the program includes follow-up mentoring visits within the next three months. The asset transfer is made in kind so that the entrepreneur can choose the required materials (or inputs) to buy according to the business plan developed during the training. A random sample of beneficiaries received an additional US$240 asset transfer on top of the regular MESP intervention. This additional transfer was implemented exclusively for this evaluation, with the objective to provide evidence on the optimal level of transfers.

Our sample consists of individuals who applied to MESP in 2010 in the Metropolitan Region of Santiago. The intervention was conducted from October 2010 to February 2011. The MESP is offered at least once a year. We randomly assigned applicants to the MESP into three treatment arms: (i) control group, (ii) access to the MESP, and (iii) access to the MESP with additional funding (MESP+). We stratified applicants using four quartiles of the SSC score and municipality of residence. In total there are 18 MESP courses. Individuals from the same municipality were all enrolled in the same training course, which they may have shared with participants from other municipalities. Individuals who were not chosen for MESP (control group) received a letter from FOSIS indicating that they were not selected due to excess demand, but that they could apply in the following year. The treatment arms were implemented with a total of 1,948 individuals. There were 566 individuals who were randomly assigned to the control group, the 689 to the “normal” MESP (T1), and the 693 to MESP+ (T2).

The baseline household survey took place between August and October 2010. The one-year follow-up survey took place between October and November 2011, 12 months after MESP started and 2 months after MESP+ was delivered. The second follow-up survey was carried out in September-December 2013, 36 months after the program started and more than 2 years after MESP+. The analysis is conducted over individuals for whom all surveys are available. We address balance among treatment groups and attrition in the following subsections. We also use high frequency administrative data from the contributions to the unemployment insurance program (UI). This is used in the analysis as an independent source of formal wage employment. The UI administrative data includes information about the jobs covered by the UI system (formal jobs) and the wage received in each job relationship on a monthly basis. All new contracts (since the law started in October 2002) are captured by the UI. We merged this monthly data for the period September 2010 to June 2014, allowing us to study the impact on formal employment 41 months after the MESP implementation, and 46 months since its start.

Randomization was performed by the researchers using STATA. We stratified by municipalities and quartiles of the Social Security Score.

Individual

No

1948 individuals

1948 individuals

1) Traditional MESP: 689 individuals
2) MESP-plus: 693 individuals
3) Comparison group: 566 individuals

Using a randomized controlled trial of a large-scale, publicly run micro-entrepreneurship program in Chile, we assess the effectiveness of business training and asset transfers to the poor. Using survey and monthly administrative data we study the effects of the program over a period of 46 months. We find that the program significantly increases employment by 15.3 and 6.8 percentages points 9 and 33 months after implementation, respectively. There is also a significant increase in labor income. The employment increase in the short run is through self-employment, while in the long run wage work also increases. In the long run, total labor increases mostly due to an increase in wage income. This is consistent with the hypothesis that skills taught during the training lessons are also useful for wage work. We also find that the quality of the intervention matter, especially in the long run. Finally, comparing two levels of asset transfers, different employment paths emerge: those who receive a low level of transfers mostly end up with salaried work whereas those who receive a high level of transfers tend to be self-employed.

Martnez A., Claudia, Esteban Puentes, Jaime Ruiz-Tagle. "Do Micro-Entrepreneurship Programs Increase Wage-Work? Evidence from Chile." Working Paper, June 2015.

http://repositorio.uchile.cl/bitstream/handle/2250/138717/Do-Micro-Entrepreneurship-programs-increase.pdf?sequence=1

Using a randomized controlled trial of a large-scale publicly run micro-entrepreneurship program in Chile, we assess the effectiveness of business training and asset transfers on individuals’ employment and income. About half of the participants had not yet started their businesses at intervention, allowing us to study the program effects by baseline economic activity. To analyze the shape of the production function, two levels of asset transfers are allocated. We find that the program does significantly increase individuals’ employment and income by 18% and 32% respectively after one year and significantly improves the business practices of its beneficiaries. The program seems more effective for individuals who are unemployed at the beginning of the program, followed by the self-employed at the baseline. The effect on wage earners is positive only for low-income individuals. This is consistent with the presence of fixed costs. The additional transfer of assets has a positive and significant effect on employment and self-employment. However, the additional transfer does not have a statistically significant effect on labor and household income, consistent with rapidly decreasing returns in the production function.

Martnez A., Claudia, Esteban Puentes, Jaime Ruiz-Tagle. "Micro-Entrepreneurship Training and Asset Transfers: Short Term Impacts on the Poor." Documentos de Trabajo, Departamento de Economa, Universidad de Chile, Vol. 380, pp. 1-54. March 11, 2013.

https://www.povertyactionlab.org/sites/default/files/publications/270_373%20training%20and%20capital%20March2013.pdf