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How can we encourage the new wave of self-employed to take on their first worker?

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  • Picture of Benedict Dellot
    Benedict Dellot
    Former Head of the RSA Future Work Centre and Associate Director
  • Employment
  • Enterprise

The UK is experiencing nothing short of a boom in self-employment. 367,000 more people became sole traders in the period since 2008, bringing the total proportion of sole traders in the workforce to a record 15 per cent. Where once we were a nation of shopkeepers, now we are seemingly one of consultants, freelancers, entrepreneurs, online marketplace traders – and whatever else comes under the banner of self-employment.

Naturally we can expect such a transformation to bring about wider changes to society and the economy – many for the better. As my colleague Adam Lent argues in a recent blog post, the proliferation of microbusinesses may be hugely beneficial for innovation, regeneration, gender equality and so on.

Yet we also have to acknowledge the downsides too – one of which may relate to jobs growth. Indeed, many have voiced concerns that large parts of the self-employed community are highly reluctant to take on a first recruit. A recent report from the Department for Business, Innovation and Skills revealed that only 5 per cent of self-employed people increased employment over the 6 year period from 2007 to 2013 – an astonishingly low number.

To their credit, the government has acknowledged this problem and taken several steps to address it. Only last week, for example, they stated their intention to introduce a sizeable cut in the National Insurance Contributions that small employers pay on their employees. This is set to benefit up to 1.25 million businesses, and will mean a third of all employers will be taken out of paying NI Contributions altogether. A business that employs 4 adults on the minimum wage, for instance, will no longer have to pay anything.

No doubt this a step in the right direction. But the problem is that this scheme, like many others, has one fatal flaw: it wrongly assumes that finance, and only finance, is what’s holding people back from taking on staff and growing their business. Look at similar schemes and it is obvious to see that finance is rarely a game-changer.

It was recently revealed, for instance, that the holiday in National Insurance Contributions launched late last year to encourage job creation had extremely low take up rates. Likewise, the Youth Contract, which supports the wage bill of employers taking on young people, has been met with an equally muted response from the business community.

In reality, many of the barriers to recruitment are psychological in nature – not just financial. The aforementioned BIS report highlighted several examples where self-employed people were constrained in their ‘vision’, consistently overestimating the costs of growing and taking on staff. For instance, they found that non-employers judged recruitment costs to be as much as £17,000, whereas employers reported these to be a much lower figure of £7,000. Other research reveals deeper biases. An interesting study published last year by CIPD found that many employers are ‘petrified’ to employ young people because they have negative perceptions about their attitudes – even though many of these are unfounded.

None of this is to say that financial schemes like the National Insurance cut are unhelpful – if anything they are likely to be incredibly useful for those already employing staff. But if we're talking about encouraging our new wave of sole traders to take the leap and hire their first worker, then on their own they are simply not enough. In the 21st century we also need policies and initiatives that recognize the people who run businesses as inherently human, and that go with rather than against the grain of their quirks, frailties and dispositions.

Benedict Dellot is  Senior Researcher within the RSA’s Enterprise Team. Follow him @BenedictDel

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  • Thanks for this Indy. Really interesting.

    It would be good to talk further if you're available. I'm on 020 7451 6836.

  • I think it is interesting that you alight on psychological issues, rather than practical ones. My experience advising some "microbusinesses" is that the practical problems are unfortunately all too real:

    1) Finance - many "microbusinesses" are painfully aware of how low and uneven demand remains in the economy. It's not necessarily a "constraint of vision" to see that you don't have enough reliably in the pipeline to take someone on. Rather it can be a realistic judgement that if you're likely to have to drop someone in 3-6 months time, it might not be worth the effort of training and equipping them in the first place.

    As I noted in a previous comment (sorry I didn't see your reply, I'm going to try to contact you about that through Twitter) there are also big problems around big business using small ones as "cashflow banks." That adds to the uncertainty.

    2) Premises - this is often ignored by those who are part of bigger organisations. Many microbusinesses (and this is part of why they may be considered an ambiguous benefit to the economy) operate on very low overheads, using their agility to (for example) run from very small premises. Once you're providing a place of work to someone else, the equation changes. (Worth noting that the provision of small premises for micro businesses remains woeful in many parts of the country.) Equipment can be a problem as well for some businesses.

    3) The quantum leap of management time. If you take someone on, you have to supervise them. Since the majority of said businesses are in service sectors, this equates to an immediate hit to capacity. Now there is a benefit in the long run, but the market isn't that friendly in the current short run.

    Part of the problem here is the abstract assumption in economics that every business is an old-fashioned factory and that increasing capacity is simply a matter of throwing some more labour into the pot. That leads to a lot of concentration by the government on "making it cheaper" to employ someone. The problem is at this size of business, taking someone on is an investment and lowering the cost a bit doesn't reduce the uncertainty of the return.

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