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

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 21^st 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