Self Employment, Entrepreneurship and Economic Growth

20 October 2011 at 11:48 am 4 comments

| Peter Lewin|

Interesting new monograph from the IEA (Institute of Economic Affairs) in the UK on: Self Employment, Small Firms and Enterprise. A pdf is available for free here. And here is the executive summary.


  • Self-employment is a form of contractual relationship which, in certain circumstances, will have greater benefits to the parties involved than an employer–employee relationship. Government intervention, however, may make selfemployment artificially more attractive by raising the costs of employment relationships.
  • Certain ethnic minority groups, older people and those without English as a first language tend to be overrepresented among the self-employed. This is partly because of the flexibility the arrangement provides but also because self-employment offers a ‘safety valve’ for those who find it difficult to find employment in the formal labour market.
  • It is vital that businesses are not impeded from moving from a situation where the owner is self-employed without employees to a situation where the business has employees. There is evidence that businesses are impeded in this way. In just nine years to 2009, the proportion of micro-businesses with employees fell by almost one fifth. At the same time the proportion of self-employed with no employees rose rapidly.
  • Women, individuals from certain ethnic groups, those with young dependants, those with low or no qualifications, those for whom English is not a first language and those who have recently experienced unemployment make up a much greater proportion of the workforce of small firms. For example, whereas 11 per cent of employees of small firms had no qualifications, only 4 per cent of employees of large firms had no qualifications.
  • Some workers will prefer to work for small firms because of the greater flexibility they offer in their working practices. In many cases, however, small firms will employ people who are talented but who are not able to negotiate the more formal recruitment processes of larger firms. Micro-businesses therefore perform an important economic and social function – employing people who might be overlooked by larger employers.
  • Genuine entrepreneurial insight and discovery tends to come from small firms. Entrepreneurship is crucial for economic growth. The nature of entrepreneurial insight is such, however, that we have no idea where it will come from – not even in the most general terms. Probably only one in every thousand ‘start-up’ firms will become one of the large businesses of the future.
  • Policies to promote entrepreneurship must come in the form of removing impediments to business and should not involve the promotion of particular business activities. It is simply not possible for government intervention to pick this tiny number of winners. All government can do is create a climate in which entrepreneurship can thrive.
  • The smallest firms are a key driver of job creation. Businesses do not start big. One quarter of employees working in firms that were established ten years earlier are working for firms that started from a position of employing only one person.
  • The cost of regulation has grown enormously over the last fifteen years. This particularly affects small firms with employees because regulatory costs act like a ‘poll tax’. Wide ranging exemptions from employment regulation and the minimum wage would be appropriate for small firms. Such exemptions would have the additional advantage of allowing the government to ‘experiment’ with deregulation. Standard terms and conditions of employment could be drawn up which would ensure that employees clearly understood the exemptions. Radical reforms of the tax system would also assist small firms which experience much greater compliance costs than large firms.
  • Moves by the government to promote entrepreneurship through the state education system or provide specific tax exemptions and reliefs for particular forms of business activity are wasteful or counterproductive.

Entry filed under: Corporate Governance, Entrepreneurship, Former Guest Bloggers, Institutions, Law and Economics, Management Theory.

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4 Comments Add your own

  • 1. Rafe  |  22 October 2011 at 12:52 am

    One of the British free enterprise groups, possibly the Adam Smith people floated a radical suggestion to make all employees into independent contractors. Can’t find the link of course.

    One of the fun things about The Australian Fair Work Act is the move to make all self-employed contractors into employees.

  • 2. Rafe  |  22 October 2011 at 12:54 am

    The Fair Work Act in Australia may be used to make all independent contractors into employees.

  • 3. Rafe  |  22 October 2011 at 1:01 am

    The Australian Fair Work Act may be used to make all self-employed contractors into employees. For example this could increase the cost of building a house by 25 to 40%. [The comment won’t post with a link so text has been lifted.]

    House-building can be a very efficient process due to the flexibility and productivity of the small traders involved and practically all the increase in housing costs in recent decades can be attributed to the land component (and demands for more things in houses these days).

    This will change radically, as described by Robert Gottliebsen and by Ken Phillips of the Independent Contractors.

    “Let me add a home-grown threat [to house prices] that few would currently recognise – the carefully orchestrated government campaign to decimate independent contracting in Australia. If the government succeeds it’s very likely it will increase the cost of building a house by 25 or 40 per cent and devastate contractor-dependent industries like IT.

    “In commercial building, including high rise apartments, the going hourly rate is between $50 and $60 which can rise above $100 for contracts where unions have negotiated more expensive deals such as the Victorian desalination plant. But there are a whole series of work practices in commercial building that restrict productivity which is one reason why apartments are more expensive than houses. Of course in the case of ‘rort’ contracts these practices go much further requiring many more workers.

    “In housing most (but not all) independent contractors charge an hourly rate in the vicinity of $45 an hour, but the real difference is not the hourly rate but the flexibility and efficiency that the independent contractors deliver. Take that away by imposing employee relationships and union work practices and my contacts in the contracting industry say you will see the cost structure probably rise between 25 and 40 per cent.

    No single action could decease productivity in Australia by a greater amount. But it is being pushed by the groups who fund the ALP and the Greens. This is going to be one of the toughest fights Australian business has ever had and the odds are that business and the economy will lose. So will those who want to build or renovate a house.

  • 4. Peter Lewin  |  22 October 2011 at 9:38 am

    Typical but really sad.

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