UK Needs US Laws and Spirit to Boost Jobs
Associate Editor, CNBC
The new UK government may have to appeal to the "special relationship" Britain has with the United States for something more than international politics.
Encouraging small business growth with American-style laws could revitalize the UK's economy, according to research conducted among UK small business leaders.
Small businesses drive much of American job growth.
In America, firms with fewer than 500 employees accounted for 64 percent of the 22.5 million net new jobs between 1993 and the third quarter of 2008, according to the U.S. Bureau of Labor Statistics.
The National Small Business Association defines a small business as any business with fewer than 500 employees, but the average small American business is just a tiny fraction of this size, at only five to six employees per firm.
In the US, "small corporations pay less than big corporations.
The laws are structured to help people get started, which is really important," Todd McCracken, president and CEO of the National Small Business Association in Washington, told CNBC.com.
But in Britain, the Federation of Small Businesses (FSB) and the Confederation of British Industry (CBI) say that support for small businesses is limited.
The government is introducing backing methods such as "UK Finance for Growth," a new public company that oversees all publicly-funded venture capital schemes.
"Helping British businesses access the finance they need to grow is crucial to protect and advance our economic recovery," Business Secretary Lord Peter Mandelson said about the scheme.
But many economists have predicted that upcoming changes in national insurance -- comparable to social security -- taxation and regulations will not help small businesses, they will instead add to their burden.
And according to accountancy and financial services group Smith & Williamson, small businesses feel that the government is not significantly addressing their needs.
Small businesses employ approximately 13.7 million people in the UK, contributing over half of the UK's total business sales.
But less than 10 percent of firms felt that there is a strong voice representing smaller companies, according to the FSB.
"Unemployment is still quite high. But small businesses will drive the recovery, if they have the right conditions to grow,” Sara Lee, press officer at the British Federation of Small Businesses, said.
The FSB is seeking a complete reversal of the 1 percent increase in national insurance contributions, increased competition between banks, and a freeze on new employment legislation, which would drive down price of credit and promote growth.
Where the Jobs Are
The reason small businesses function as hiring powerhouses in both the US and the UK is because they tend to hire fewer workers, and those workers are more productive, easier to lay off, and receive fewer benefits than those employed by the state .
“It’s always been the first place to pull us out of recessions,” McCracken said. “Small businesses are just a lot more nimble than their larger competitors. While small businesses create the jobs, they also become big businesses – which are why they’re so important. They grow the whole economy.”
In Britain, the Department for Business, Innovation and Skills (BIS) estimates that small firms account for less than half -- only 47.9 percent -- of private sector employment, while in America, this figure is over 50 percent.
Small firms tend to create more jobs, but high rates of business failure among small firms also mean that more of these jobs are lost.
The net picture of job creation hides an underlying picture of substantial firm ‘churn’, according to a University of Westminster study about the UK business market.
But the study also indicates that small firms are more likely to provide the unemployed and inactive with experience in the labor market, a valuable boost to their human capital that larger firms may be less likely to provide.
Government jobs, on the other hand, tend to be more secure than those in the private sector, and aren’t usually subject to business cycles. In fact, they are often countercyclical, with government hiring the unemployed in downturns.
For instance, according to James Platt, press officer at the Department for BIS, employment in the public sector has increased by 288,000, compared with a loss of 498,000 in the private sector between 2007 and 2008 (although this does include a reclassification of Northern Rock and RBS/Lloyds from private to public sector.)
The Land of Opportunity
One reason why the British economy may lack the kind of small business job creation seen in the US is because of cultural differences relating to ambition and social standing.
“People go from lower rungs to upper rungs of society much quicker by starting your own business. It’s much harder to do that if you work for someone else,” said McCracken.
But populations can be more risk averse in countries with large social welfare programs or a tradition of linelong employment in the public sector.
One controversial implication of this, which has been a source of a heated debate, is that European migration has driven what small business job creation there has been in Britain.
One estimate made by the Department of Work and Pensions suggests that migrants have accounted for 52 per cent of the approximate 2 million new jobs created since 1997.
Some argue that the real reason behind Britain’s less dynamic small business culture comes down to the excessively complex tax laws, as small companies generally have to pay a higher level of taxes, employee benefits and file more paperwork than their American counterparts.
The FSB found that most UK small business would have increased staff if there were less red tape and simpler taxes, according to a survey of 1,600 of its members (small businesses) in February 2010.
The FSB is calling for simplification of these laws. "In the US there’s a feeling that it’s too hard to start a business, but look around the world. It’s comparatively easy. There are fewer licensing restrictions, it’s easier to get credit," said McCracken.
"(The ease of start-ups) has probably been the single most important ingredient in the economic growth over the last two decades,” he added.