The only realistic prospect of easing the pain of fiscal retrenchment is to grow faster than predicted. For this we do not need government to spend more, rather we need them to focus on re-tuning the engines of growth.
In Self-employment, Small Firms and Enterprise I consider a range of evidence that identifies young start-up firms as the major engines of net job creation. Unfortunately, the smaller firms which emerge from this hive of start-up activity are disproportionately burdened by the fixed costs that regulation and legislation impose, when compared to larger firms. If we also consider the finding that smaller firms are more likely to be employing individuals from groups who traditionally face disadvantage in the labour market, there are compelling arguments for reduction of these burdens.
The barriers that small firms face when they wish to formally employ their first members of staff are particularly daunting. Allowing small firms to employ a number of staff under arrangements that are the same as if they were commissioning work from the self-employed, is one way of reducing these barriers. This may have implications for the revenues flowing to HMRC, but it would likely provide an immediate fillip to growth and in the longer term encourage smaller entrepreneurial ventures to achieve critical mass.
Many commentators will worry about the trade-offs that seem to be at work here – we are apparently paying a price for improved growth prospects by reducing the protection afforded to employees in small firms. But we must remember that in small firms the only real guarantee of job protection is the survival of the firm. Furthermore, the contribution of each employee is substantial enough to make a difference to the bottom line. As we might therefore expect, the evidence is that employees in smaller firms feel that managers are better attuned to their needs, even though they also report that policies and practices are much less clearly defined. Employment relations in small firms are very different to those in large firms and warrant a different approach.
In the present environment, the government does not have enough financial heft to make a difference to the demand-side. Any new initiatives in this area simply re-arrange deckchairs on the Titanic. Rather, it is the start-up firms and the entrepreneurs that run them who represent the only opportunity for sustainable economic growth. They create genuinely new value, through their insights into how we re-combine technology, people and places in ways that drag society forward to new eras of expansion. Government cannot predict who these people and enterprises will be, but they can remove many of the impediments placed in their path.