Another tsar we don’t need

The government has appointed Michelle Mone as its start-up tsar. Presumably that’s different from a self-employment tsar because we’ve already got one of those. The government thinks we need more startups and it has asked Ms Mone to help and encourage more people to start businesses, especially in economically deprived areas.

The trouble is, persuading people to start new businesses might not do much to revitalise depressed areas. A 2008 study by Pamela Mueller, André van Stel and David J. Storey found that new firms created jobs but only in the areas which were already prosperous.

Our first finding is that in some locations increases in new firm formation do indeed lead subsequently to new employment, but in other cases they do not. Our second result is that the impact on employment is greatest in the prosperous areas and least in the least prosperous areas.

study by David Storey earlier this year found something similar. New firms thrive in high wage areas and they fail in low wage ones. In poorer areas, there just isn’t the money to enable businesses to grow. As fast as new businesses create employment for their owners, they destroy it by taking business from others.

As Paul Nightingale and Alex Coad say, the typical British startup is a shop or takeaway that, if it survives, just puts another one out of business. 

The typical entrepreneur is more like someone who starts from an underprivileged position (people with good jobs are less likely to start firms), uses his/her savings to start a low-productivity firm (e.g., a fish-and-chip shop), in an established highly competitive market (e.g., a town with two fish-and-chip shops, but a market that can only support one). As a result, if they are still around in 2 years, which is unlikely, it is only because they have displaced a similar marginal firm.

And their impact on the local economy?

It certainly is the case that a small number of start-ups has a positive impact on the economy, but most of the time, for most of the firms, and for most of the performance metrics, the economic impact of entrepreneurial firms is poor.

A recent report by the Joseph Rowntree Foundation and the Social Market Foundation found that self-employment is no easy route out of poverty:

[T]here is little guarantee that promoting more self-employment will act as a panacea for poor access to work. Much self-employment is low paid. And often, particularly where the underlying factors contributing to poor work opportunities are low skill levels or poor local economic conditions, promoting self-employment does not tend to work as a way of creating jobs. These same factors – low skill levels and poor local economic conditions – also reduce the likelihood of success in self-employment.

If the area where you live is poor, there won’t be many people with the money to buy what you have to sell. If there are no companies taking on people with your skills, there won’t be many willing to hire you as a freelancer. If the local economy is depressed, lots of people setting up shops won’t make it any less so.

For most people, the financial rewards from self-employment are low. Earlier this year, Michael O’Connor, using a FOI request to HMRC, showed just how low.

These charts show the numbers and average earnings for those self-employed people earning below £100,000, grouped by their different circumstances.

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About half the self-employed have income from other sources but for those who have no other income, their average earnings are extremely low. It’s not surprising, then, that the self-employed are more likely to be claiming tax credits than those in employment.

Screen Shot 2015-08-13 at 16.18.33Chart via RSA

Encouraging people in poor areas to set up new businesses will simply shift them from one form of poverty to another and may well shunt some of their neighbours who are currently running businesses back into unemployment. There will be the occasional success story which the government will use to show the scheme’s success but the overall impact on jobs and the local economy is likely to be slight. Businesses thrive where there are people with money to spend. Small businesses are most likely to succeed where there are big businesses buying their products or paying their customers’ wages.

Some people have suggested that Michelle Mone lacks the credentials to be the startup tsar. I don’t know enough about her to comment but the choice of tsar is not the problem here. Poor areas don’t have the resources to support new startups. The best business brain in the world isn’t going to change that.

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5 Responses to Another tsar we don’t need

  1. There are frequent start ups in my suburb. The majority tragically close within 2 years. Most of them obviously had not done their market research prior to opening eg, estimating the footfall and the hit-rate therefrom. If Ms Mones had been advising these startups then she should have advised against opening. So I don’t really see how appointing a start up Tsar is going to help.

    And yes, what can I say about “solutions” which fail to recognise demand as the limiting factor?

  2. So what’s the solution? New businesses in poorer areas should be encouraged to enter the ‘tradable sector’ where they can ‘export’ their goods and services to better off areas in their region; supplying, say, underwear to Michelle Mone’s firm rather than fish and chips to the locals? That won’t be easy to do, as I suspect a lot of these start ups rely on their local networks to get business – tying them to their area.

    And while it won’t expand employment, surely their is some benefit in new competitors coming in and setting up more popular fish and chip shops?

    • metatone says:

      Let’s look at a successful startup – ASOS – from their website:

      “”We’ve got four locations in the UK. In London (Camden), you’ll find our head office (a beautiful art deco building, which used to be an old tobacco factory!). This is where most of our teams are based.

      Customer Care is based in Hemel Hempstead – and just a hop, skip and a jump away from Euston train station. This is where we make sure our customers are happy and well looked after.

      Our Warehouse is based in Barnsley – it’s the size of six football pitches, so pretty huge. Every one of our products comes here and is checked, picked and packed before making its way by air, land or sea, to be delivered.

      And, we have a Technology hub based in Birmingham’s revolutionary arts and media quarter.””

      This is not proof, but it is an illustration that:
      The problem is that for many businesses, the production bit is the least well paid. The bits that are well paid tend to involve networks and agglomeration. So, in this case, Central London and Birmingham. If you had invented ASOS before ASOS, you’d need to have moved HQ to London probably to get the needed investment…

  3. Pingback: Inverting the rhetoric of inequality | Homines Economici

  4. Paul Southon says:

    So, encouraging startups may well serve to increase inequity rather than reduce it. There is still the myth that anyone can be an entrepreneur and make a million if they work hard enough. While there are a very few successful (lucky?) individuals for most people this is just not true.

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