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.
A 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.
[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.
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.
Chart 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.