Today we launch a new report called Everyday Employers, looking at how behavioural insights might be used to encourage business owners to expand their operations and take on employees. Here are the topline findings:
#1 – The number of microbusinesses is growing rapidly, but the vast majority are one-person businesses
One of the most notable and enduring economic stories of the past few years has been the rapid expansion in the number of microbusinesses, defined as firms with 0-9 employees. Figures released just today show there are close to a million more microbusinesses than there were when the recession first began in 2008. Yet an even more significant trend has been the rise of the one-person business. As the graph below shows, the number of firms with zero employees (i.e. just the owner) has grown by around 70 per cent since the turn of the century. In fact, almost 95 per cent of all the growth in the microbusiness population over the last decade is owed to non-employing firms.
#2 – This is concerning because microbusinesses typically employ some of the most vulnerable groups in society
While the rise in microbusiness numbers should be welcomed, the fact that this trend has been driven predominantly by ‘one-man bands’ should prompt concerns over jobs growth. Indeed, there is evidence to suggest a widespread reluctance among the newly self-employed to take on recruits. Only 3 per cent of non-employers took on staff (and kept them) over the five-year period from 2007 to 2012 – a remarkably low number. Moreoever, this is most likely to impact job seekers on the economic margins, since microbusinesses have historically been a source of employment for people with poor English language skills, migrants and people outside of the ‘prime’ working age (25-49 year olds). We suggest setting a modest target of doubling the aforementioned recruitment rate from 3 per cent to 6 per cent, which would create an extra 100,000 sustainable jobs over 5 years.
#3 – Government efforts to drive job creation among microbusinesses have been largely unsuccessful
This problem has not escaped the attention of past and present governments, which have devised a number of measures to stimulate recruitment and growth among the self-employed. In practice, most of these interventions have concentrated on three areas: (i) deregulating the labour market; (ii) providing more information; and (iii) easing the flow of finance. Their impact to date, however, has been very limited. The Youth Contract, which subsidised the wages of young people taken on by employers for 6 months, only supported 12,000 people into work against an original target of 160,000. Likewise, just 6 per cent of employers decided to take up the recent holiday in National Insurance contributions. Our RSA/Populus survey found that 39 per cent of the self-employed were unaware that such schemes even existed.
#4 – This is because they fail to speak to all three types of barrier: pragmatic issues, mindsets and cognitive biases
The failure of conventional policy levers indicates the need for a fresh approach to business support – namely through the use of behavioural insights. These refer to new ways of thinking that draw upon the domains of behavioural science and psychology to better understand people’s actions, attitudes and aspirations. Using these insights has led us to identify three types of barrier to recruitment and growth among the self-employed:
Pragmatic – Genuine practical obstacles that discourage or prevent one-person businesses from recruiting employees. This includes burdensome regulation, poor management skills and irregular cash flow.
Mindsets – Negative ways in which business owners interpret themselves and their social surroundings, which may diminish the desire to grow their business. One aspect of this relates to exaggerated fears (e.g. around red tape) that are rooted in low feelings of self-efficacy.
Cognitive biases – Systematic deviations in rational thinking that hamper effective decision-making. This includes myopia (our tendency to heavily discount the future) and the planning fallacy (our inclination to overestimate the amount of work we can do on our own).
#5 – Breaking down these barriers will require far more experimentation in business support
While business owners and those supporting them are most attuned to pragmatic issues, the barriers relating to mindsets and cognitive biases are often so subtle as to be almost invisible. As such they require more imaginative interventions to address them. Among our proposals are to:
Establish host employers – Housing associations, FE colleges and other local institutions should be encouraged to legally ‘host’ employees on behalf of business owners, and to help them manage back-end HR tasks.
Appoint information curators – Government departments (e.g. BIS, DWP and HMRC) should appoint information curators who could draw upon behavioural insights to improve the framing of messages directed at business owners.
Introduce a business adviser role for accountants – Accountants should be encouraged to support their business clients with information and advice about growing their business, possibly enabled through a new business coaching module in their accountancy training.
Embed ‘story-editing’ techniques within business support – Business support practitioners should use new story-editing techniques to help business owners reinterpret their personal narratives and improve their self-efficacy.
Organise randomised meet-ups – Business support groups and local authorities should co-ordinate randomised meet-ups between business owners, in a bid to expose them to different viewpoints.
Introduce ‘growth prompts’ – HMRC and banks should consider implementing a triggered system whereby business owners are automatically sent messages questioning their recruitment intentions as soon as their financial data indicates strong business performance.
Support the development of ‘quantified venture’ apps – The government and business support groups should promote new apps that enable business owners to collect and make sense of data about their venture, including the projected costs of taking on an employee.
#6 – It’s time we called it a day on ‘common sense’ interventions
Any drive to introduce more experimentation within business support must be accompanied by a greater willingness to test interventions and learn ‘what works’, including through more randomised control trials (RCTs). A common message running throughout our findings is that common sense does not always prevail in policymaking. Our gut instinct, for instance, tells us that giving business owners wage subsidies should lead them to take on more staff. Yet the experience of the Youth Contract suggests that crude financial incentives often do little to change people’s behaviours. Likewise, there is a natural urge among policymakers to pump out more information in a bid to stimulate employee recruitment. But again, a growing body of evidence highlights the limitations of blanket communication exercises.
The essential message of this report is that we need a support system based on how business owners actually behave, rather than on how we think they should behave. Only by doing so can we devise interventions that have a significant impact in stimulating employee recruitment and growth.
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