Out of Touch: Obama’s DOL Thinks Jobless Should Use Unemployment Insurance to Start Businesses

June 5, 2012 - 11:07 AM

Forget about paying the rent - the Obama administration wants jobless Americans to use unemployment insurance to start a business.

The Department of Labor recently released guidelines for Self-Employment Assistance Programs (SEAs) that will allow unemployed entrepreneurs to continue to collect unemployment benefits while attempting to start-up a business. The $35 million grant is part of the Middle Class Tax-Relief and Job Creation Act that was signed by President Obama.

Entrepreneurship, job creation, small businesses—sounds great, eh?

Here’s the catch: it was the Obama Administration’s big-government policies that got us into this economic mess in the first place. American’s—especially young entrepreneurs—shouldn’t buy this gimmick.

The SEA program provides a grant of up to $10,000 to entrepreneurs whose business plans are approved by state program officials. In addition, entrepreneurs will receive up to 26 weeks of a federal stipend equal to the amount they would have received in unemployment compensation as well as entrepreneurial training.

For young people—who make up 40 percent of the overall population of unemployed—this sounds pretty great, but there are a few problems with this. SEA grants don’t count for even a third of average start-up costs

The Small Business Administration estimates that current start-up costs average around $30,000, though this even seems questionable. The money received through the SEA program would only cover 1/3 of this. Although it is possible to successfully start a business with less money, it is highly unlikely—especially when you factor in big-government regulatory provisions.

Regulatory measures are far more costly on average for smaller businesses like the ones SEA will supposedly start. Smaller businesses (firms with 20 or less workers) spend on average 36 percent more per employee than larger businesses. For example, firms with less than 20 employees will spend $10,000 per new employee in regulation costs, while a firm with 20-499 employees will only spend $7,454. Not exactly cheap.

And ObamaCare will only make it worse. ObamaCare makes hiring new employees—especially younger employees—vastly more expensive. Assuming ObamaCare isn’t overturned, employers will pay 50 percent more for health insurance for younger people. From a business standpoint this means scaling back by laying off workers or lowering wages.

Factoring in these costs, SEA money will hardly be able to cover food and healthcare ontopon top of other start-up costs.

And unfortunately, the numbers will only continue to increase through the years.

Setting Up New Business Owners to Fail

The SBA estimates that on average small businesses will run a credit of $80,000 a year. These costs will be accounted for only if a business successfully brings in enough revenue to cover them—and not many do.

The ratio of successful small businesses after two years is 7:10, and this number continuously shrinks as time goes by. Only about 1:4 small businesses survive after 15 years.

With these numbers, the SEA program is simply unfeasible and encourages far too risky behavior—especially for recent college graduates.

The Obama Administration’s anti-youth policies have hit Generation Y the hardest amongst any other demographic. Around 50 percent of students this year will graduate without a job—most of which will be forced back into their parents basement.

Students also graduate college averaging around $26,000 of student debt. With student loan defaults on the rise, young people are more worried about paying off loans and the cost of living than taking on additional debt to try to start a business with minimal SEA funds.

The SEA program sounds great, but it is just another gimmick the Obama Administration is using to jack up employment numbers. Before the government starts another stupid program, it needs to fix its own regulations which are killing jobs. If young people want to see employment, entrepreneurship opportunities, and independence then they must take action and vote for candidates that promote pro-youth, limited government policies.

Editor's Note: Celia Bigelow is Director of Campus Action for American Majority Action.

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