Professor Philip Booth is the Editorial and Programme Director at the Institute of Economic Affairs
Earlier this week, two bits of bleak news were announced. The first was the huge rise in unemployment. The second – apparently technical and mundane – was the release of detailed figures on self-employment and the size of firms. If politicians are to deal with the growing tragedy of unemployment, they need to look beneath the headlines to see the growing sickness within the small business sector.
The detailed figures published yesterday coincided with the publication of research by Institute of Economic Affairs author, Peter Urwin, under the title Self-employment, Small Firms and Enterprise. In the last decade the proportion of micro-businesses with employees has fallen by a quarter whilst the number of self-employed has grown enormously. The problem is that the smallest businesses do not seem to want to take on labour. This is a disaster for the future health of our economy; it is also a social disaster.
At the heart of these trends is regulation, which affects small enterprises to a much greater extent than large businesses. Regulation is like a poll tax on businesses. The impact of tax regulation, for example, is sixteen times greater on our smallest businesses than on our largest. Employment regulation and, in some sectors such as childcare, product market regulation also disproportionately affect small businesses.
To some extent, the effects of this are economic: fewer small businesses with employees and more large businesses who can cope with the regulation may be inefficient and reduce growth. But, there are also social effects. The IEA research shows up some interesting insights into the sort of people who tend to be self-employed or employed by small businesses: 11% of employees of small firms have no qualifications, compared with 4% of employees of large firms. 18% of people working for small firms had a language problem as compared with only 8% of people working in large firms. 2.5% of people working for companies with less than 10 employees were unemployed 12 months ago compared with only 1% of people working in large firms.
If we look at the employment patterns of various ethnic groups and women who look after children we see the same trend – small businesses tend to employ people who, for various reasons, are not suited to the rigid requirements of larger businesses. If we prevent small businesses being the engine of job creation, we cut off opportunities for many of those at the margins of the labour market.
What should we do? Small businesses should be exempt from substantial parts of employment regulation. The British Chambers of Commerce have estimated that recent employment regulation measures alone will add over £22 billion to business costs over the remainder of this parliament. This is a disaster. The government’s deregulation agenda is simply mythical.
Tax compliance is another area that creates difficulties for small businesses. George Osborne made great play out of reducing the tax code by 100 pages in the last budget, but that is only one per cent of the tax code – which is the longest in the world – and some of those pages only applied to one firm! At the same time more complexities were added in the very same budget.
Our author argues that we should deal with this by allowing employees of very small companies to have self-employed status. This would make an enormous difference to the smallest companies.
Does this send us back to the age of little boys going up chimneys as Vince Cable recently suggested that many deregulators wanted? No: it would merely rewind the clock back towards 1997 – and we need to go much further. But, these reforms would be a start.
Indeed, people who work for smaller companies report themselves as being happier than people who work for larger companies. On the whole, a less regulated, less bureaucratic environment would suit employees of small companies. But the key issue is this. If we do not rapidly deregulate the small business sector, unemployment will not fall, unemployment terms will rise and the most vulnerable people – who are disproportionately employed by small firms – could remain trapped out of the labour market for a lifetime.