Deregulate business to save our economy and mend the “broken society"

Earlier this week, two bits of bleak news were announced. The first was the huge rise in unemployment. The second – apparently technical and mundane – was the release of detailed figures on self-employment and the size of firms. If politicians are to deal with the growing tragedy of unemployment, they need to look beneath the headlines to see the growing sickness within the small business sector.

The detailed figures published yesterday coincided with the publication of research by Institute of Economic Affairs author, Peter Urwin, under the title Self-employment, Small Firms and Enterprise. In the last decade the proportion of micro-businesses with employees has fallen by a quarter whilst the number of self-employed has grown enormously. The problem is that the smallest businesses do not seem to want to take on labour. This is a disaster for the future health of our economy; it is also a social disaster. 

At the heart of these trends is regulation, which affects small enterprises to a much greater extent than large businesses. Regulation is like a poll tax on businesses. The impact of tax regulation, for example, is sixteen times greater on our smallest businesses than on our largest. Employment regulation and, in some sectors such as childcare, product market regulation also disproportionately affect small businesses. 

To some extent, the effects of this are economic: fewer small businesses with employees and more large businesses who can cope with the regulation may be inefficient and reduce growth. But, there are also social effects. The IEA research shows up some interesting insights into the sort of people who tend to be self-employed or employed by small businesses: 11% of employees of small firms have no qualifications, compared with 4% of employees of large firms. 18% of people working for small firms had a language problem as compared with only 8% of people working in large firms.  2.5% of people working for companies with less than 10 employees were unemployed 12 months ago compared with only 1% of people working in large firms.

Read the rest of the article on ConservativeHome.

Deregulation would require real cuts in the public sector so that will not happen. The government, (EU), is not just politicians as we all know the regulation keeps them in work. It's not going to happen until the current political landscape changes dramatically . Which looking at the way events are unfolding at the moment it will. And it is not going to be pretty at all.
What I would see fit to reduce employment regulation and create more jobs is to eliminate income tax on newly employed for the first year or two. This would particularly be aimed at young people seeking their “first job”, in order to reduce high levels of youth unemployment. Businesses would welcome a cut in hiring costs. However, they can only start hiring if they start producing and investing. Therefore, tax incentives (such as low-tax entrepreneurial zones and/or a flat tax) have to come first in order to support business production. This will eventually be followed by higher production levels (higher supply) and will lead to firms start hiring more. With more people having new, safe jobs, they will increase their consumer goods consumption which will all together lead to a rise of aggregate demand. What is important to note is that this is a gradual process and one needs to be patient in order to see its full effects. A credible promise of fiscal sustainability, signals of tax incentives for businesses and changes in the labour market will send positive reinforcement to banks and investors and will work towards increasing their confidence. I wrote more on that here: http://im-an-economist.blogspot.com/2011/10/restoring-confidence.html

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