Government fails to convince new generation of business owners to take on staff

Government schemes aimed at encouraging one-person businesses to take on their first member of staff have had little impact with only 3 percent of sole traders hiring (and keeping) someone between 2007-2012, according to the latest report from the RSA.

Published to coincide with the release of the latest Business Population Estimates, Everday Employers recommended that the government set a modest target of doubling this recruitment rate to 6 percent in order to create an extra 100,000 jobs over the next five years. Some of the key findings of the report include:

• Only 3 percent of sole traders created long-lasting jobs over the recessionary period 

• Government employment schemes falling well short of intended targets

• New approach needed that uses nudge theory to tackle inertia and short-termism among business owners

View the Everyday Employers report

The report found that self-employment accounted for approximately 90 per cent of all jobs growth between 2008 and 2013.  However, virtually all growth (95 percent) of the microbusiness population over the last 10 years is owed to the rise of non-employing firms. There has also been a decrease in the number of 2-person businesses, indicating many business owners may have shed their sole staff member for economic reasons, the report said.

Despite identifying the hurdle of taking on a first employee as 'the most important brake on growth', government measures aimed at tackling the problem have fallen well short of their intended targets:

• The National Insurance Contribution holiday, aimed at making is less costly to hire a new recruit, had very low take-up rates with just 6 per cent of the expected number of businesses benefiting from the tax break

• The Youth Contract, which was introduced in 2012 to subsidise the wages of young people taken on by employers, only helped 12,000 participants into work against an original target of 160,000

• The Shares for Rights initiative, which aims to stimulate recruitment by enabling employees to forgo rights in exchange for a stake in the company, resulted in less than 0.1 per cent of business owners planning to introduce the scheme

The RSA report warned that those people at the social and economic 'margins' lose out most, as microbusinesses are more likely to employ people with low or no qualifications, poor English skills, parents with young dependents, the recently unemployed and members of particular ethnic groups.

The report concluded that the government's disappointing experience of using finance, deregulation and information provision indicates the limitations to 'common sense' interventions, and points to the need for a fresh approach to business support.

The RSA called for new measures informed by behavioural insights, which aim to treat business owners as humans rather than as 'calculating individuals'. This means tackling growth barriers relating to mindsets and exaggerated fears, as well as addressing deeply embedded cognitive biases.

The report pointed to the human tendency for short-termism, excessive control and an innate desire for the status quo as just some of the cognitive obstacles holding business owners back from growing their venture and taking on staff. Several recommendations are put forward by the RSA, including to:

• Promote employee sharing – Employment agencies and business groups should co-ordinate and promote 'carousel' employment models, whereby business owners with fluctuating demand are able to share employees

• Introduce an automatic allocation for wage subsidies – As part of any new wage subsidy scheme, the government should automatically allocate business owners a pot of subsidies, which they would 'lose' were they not to use it

• Create a new 'growth pledge' – Business support practitioners should encourage business owners to verbally state and/or write their commitment to grow their business and take on staff (should they wish to do so)

• Introduce a business advisor 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

• 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

Commenting on the report, Senior RSA Researcher Benedict Dellot said:

"With so few self-employed people taking on staff, we need to ask ourselves where the jobs of the future will come from. Whilst the government has sought to address low recruitment rates with several new initiatives, few have had any meaningful impact – despite costing millions."

"This is because they do not speak to the full set of barriers that prevent people from taking on staff. Business owners need to be treated as humans – with all the quirks and frailties this entails – rather than as calculating individuals. We recommend the government reassesses its current approach, and begins to design a support system based on how business owners actually behave, rather than how we think they should behave."

View the Everyday Employers report

Notes to editors

1.    For more information contact Luke Robinson or call 020 7451 6893 or 07799 737 970

2.    Key highlights of employee recruitment include:

• The number of self-employed people has increased by 30 percent since 2000

• Only 3 percent of sole traders hired someone (and kept them) over the 5-year period from 2007-2012

• Doubling this recruitment rate to 6 percent would result in an extra 100,000 more jobs being created (and sustained) over the same 5-year period

• 55 percent of the self-employed agree they would prefer to hire freelancers than recruit staff on payroll (15 percent disagree)

• 40 percent of the self-employed agree they would prefer to hire family and friends before anyone else (33 percent disagree)

• 39 percent of the self-employed disagree that they are aware of recruitment initiatives such as the National Insurance contributions (NIC) holiday and the Youth Contract (37 percent agree)

• Only 6 percent of the expected number of businesses signed up to the government's recent NIC holiday