The secret saviours of jobs are small businesses

By Neil Patrick

The UK economic recovery is forging ahead with record numbers of people in work, but is this really the good news we've all been longing for?

Yesterday, I was reading a post on the Daily Telegraph website with the headline, “UK Jobs Growth Rises at Fastest Rate in 43 Years”.

It quotes the ONS which reports that UK jobs “growth between January and March rose to a 43-year high, driving down the unemployment rate to its lowest level in more than five years”.

Other headlines were:
  • The number of people in work rose to 30.43m - a record high 
  • The unemployment rate dipped a tenth of a percentage point to 6.8% 
  • The number of people out of work in the quarter fell by 133,000 to 2.21m compared with the previous three-month period. 
  • At the same point last year unemployment stood at 2.52m. 
Of course the government are reporting these numbers with glee as well. And I don’t wish to rain on the parade. We all need some good economic news and this certainly isn’t bad news.

But neither is it particularly good news when we look behind the headlines. In fact the most noticeable aspect of the data can only be described as stagnation.

“Self-employment” is the number one reason behind both the rise in the number of people in work and the lower jobless rate.

Almost one in seven people - some 4.55m - are now classed as being self-employed, the highest level since records began in 1971. The number of people working for themselves has risen by 375,000 over the past year.

But many of these people working for themselves are not able to get enough work, with 1.29m of them working part time, though for some this is a matter of choice.

Aengus Collins, UK analyst at the Economist Intelligence Unit has highlighted the real concern:

"The latest numbers confirm the rapid and continuing improvement of the headline labour market numbers, with unemployment now at a five-year low. However, just as the recession of the last few years was no ordinary recession, so the recovery is displaying some curious patterns (professional understatement? –Ed.).

“This is particularly true of labour market conditions. The UK's unemployment rate fell to 6.8%, but we have concerns about the profile of the jobs that are driving this. The increasing use of zero-hours contracts is well documented …but one of the labour-market developments that can get overlooked …is the rapid rise since the crisis of the number of self-employed people in the UK.

“The recovery of total employment since the crisis has been driven by rising self-employment. (My emphasis –Ed.) Given the backdrop, this is less likely to represent a surge in entrepreneurial dynamism than a fall-back strategy for people who lost jobs during the crisis."

He added that the forced move into self employment may be the major factor behind what he called the "shocking halt" in productivity growth that has occurred since the financial crisis hit in 2008.

And I think he is right. All is plain to see in the graph below. So what if we have a record number of people in jobs? That number means very little if productivity and incomes are not rising too.

Zero-hours contracts result in many low paid workers having completely random amounts of work and consequently pay. Many of those statistically classified “self-employed” are in reality self-unemployed.

Jeremy Cook, chief economist at World First:

"We have seen the biggest quarterly improvement in employment since records began, in 1971, over the past three months. Unfortunately this has not come with a continued rise in ‘real wages’, with average earnings only rising by 1.7pc, the same as last month.

“The disappointment surrounding real wages outweighs any positive sentiment coming from the fall in the overall rate of unemployment to 6.8pc. This lack of wage inflation will keep overall CPI lower in the short term and, more importantly, will allow the Bank of England to maintain low rate expectations into next year."

John Salt, director of jobs website

"Unemployment has now been trending downwards since late 2011. This has led to a steady supply of good news stories for the government, with job creation becoming the cornerstone the Conservative Party’s election campaign for 2015.

"However, the underlying problems in the job market endure. Yes we are seeing more people in work, but youth unemployment remains high when compared to other developed economies as nearly a quarter of a million under 25 year olds have been out of work for more than a year. The government needs to invest more to help the young find full time work and create meaningful job market growth.”

These commentators all make valid points in my view. We remain a long way from a real jobs recovery in the UK. In fact what we have is essentially more people classed as being in work, when in reality they are at best only working occasionally; low paid workers seeing falling standards of living as inflation exceeds income growth and a polarised recovery with strong growth in London and the South east and stagnation elsewhere.

But there is some genuinely good news if we look deeper still:

The number of UK micro-businesses has grown by over half a million since the Great Recession began.

Some believe that this will be short-lived, and that when the economy gets back on its feet, things will return to ‘normal’. However, this ignores the fact that self-employment and the number of micro-businesses had been increasing at a steady rate long before the recession began:

The number of micro-businesses in the UK has grown by an average of 3% a year since the start of this century. They are now very much a ‘normal’ feature of our economic system.

Studies also suggest that at an individual level, the likelihood of a business owner returning to a typical job is low. A Survey by RSA found that only 7% of micro-business owners plan to close their business in the next 3-5 years and do something else.

Governments are not really fans of micro-businesses. They are after all a great deal more difficult to manage and help than large businesses. Governments are large bureaucracies. They like big, policy-based initiatives which can be implemented universally.

A micro-business is the exact opposite. It’s local. It exists day to day on the wits and skills of often just one or a handful of people. They work to extraordinarily short time-scales. They have no time to engage with governments on governments’ terms. They are completely unable to spend their time writing business plans, compiling data and jumping through administrative hoops. They have to find new customers and serve the ones they have to the best of their ability. Every single day.

Micro-businesses are not scaled down large businesses. They require a completely different type of government support. And governments find such complexity difficult to deal with.

The UK has a growing entrepreneurial class of micro-business owners. And these businesses hold the keys to the real future of the UK economy. Not because they will all become large businesses, but because they are by their very nature entrepreneurial. They create jobs and vital experience for the young. And they foster a spirit of self-reliance.

They may not be the next Apple or Amazon but critically, they keep money within their local economy, rather than it disappearing via some complex corporate structure and accounting mechanisms into an offshore tax-haven.

Politicians of all parties need to learn what these businesses really need and start providing it in a way that they can easily absorb it. Not pandering to the wishes of large corporations. Not creating more complex bureaucracy laden ‘initiatives’, but recognising that small businesses need help much more than big businesses. And delivering it in an appropriate way.

The statistics prove the green shoots are here. And the most valuable ones are in the small business sector.


  1. Neil,

    What is zero-hours contracts? It is not a term we use in the US of A.

    1. Hi Marc,

      Yes , it's a UK trend becoming particular prevalent in low paid jobs.

      It basically commits the employee to being available "on call". However, the employer has no obligation to provide work for the employee. The employee agrees to be available for work as and when required, so that no particular number of hours or times of work are specified. The employee receives compensation only for hours worked.

      It's a highly contentious but nonetheless prevalent practice.

      Good to hear from you. Hope we can catch up again soon :-)