Red Tape

Prof Philip Booth writes for ConservativeHome

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.

Read the rest of the article on ConservativeHome.