This isn’t a golden era for small business; it’s more interesting than that

small businessesYesterday, the Prime Minister’s Enterprise Advisor Lord Young produced a report into the key trends experienced by the UK’s small businesses over the past five years. According to the headline figures presented by the report, this is a ‘golden era’ for small businesses in the UK, with a record number of small firms in the country. The reported 5.2 million small firms represents an increase of 760,000 over the five year period covered by the study. The report concludes that the main drivers of this upsurge are the growing belief people have in their own ideas and abilities coupled with the technological wherewithal to make them a commercial reality. Lord Young also claims the Government deserves some credit for providing the business landscape for this to happen. But is it really that simple?

Well, partly.

One thing the report glosses over to a large extent is the degree to which this increase is down to the remarkable growth in the number of self-employed and one person businesses in recent years. While the word ‘freelance’ only crops up twice in the 52 page publication, and the expression ‘self-employed’ just five times, over the same period the number of people described as belonging to those categories increased by around 650,000, accounting for more than 85 percent of the overall increase in small businesses.

To add more context to what is really going on, we can also turn to data from Companies House. In December 2013, a House of Lords committee was informed that around 44 percent of UK limited companies are one person businesses. Companies House also publishes a monthly report recording the statistics for the formation of new businesses. According to current data, there are 2.7 million limited companies on the Companies House register, meaning nearly 1.2 million of them are one-person limited companies.

The report is being disingenuous in its suggestion that this represents a golden era for small businesses because what it actually represents is a new era of freelance and self-employed work and a growing rejection of the old norms, with one in seven people now classed as working for a microbusiness. This is an entirely different thing to a small business in the way politicians mean and, although Lord Young’s report acknowledges the dominance of the microbusiness in its data, his conclusions obscure this fact by invoking a more familiar and politically more digestible idea.

Last year the Royal Society of the Arts (RSA) published its own report into the phenomenon. Amongst other things it set out to challenge some of the preconceptions of the characteristics of this upheaval and the motivations of the people involved. Two things are most pertinent.

Firstly, the RSA study found that most people weren’t forced into self-employment by financial necessity and as a way of escaping unemployment. It found that this was true for 27 percent, which is still a significant proportion but challenges the idea that freelance is a last ditch attempt at escaping unemployment for those without the skills to do much else. In fact the report highlights the high skill levels of this group and their heterogeneous nature.

The idea that this form of work is a choice is also borne out by the second relevant takeaway from the study. While freelancers earn less and are more isolated than their employed contemporaries, they are also happier and enjoy their work more. This does not reflect well on employers and traditional forms of work and has profound implications for all employees and firms of all sizes.

Lord Young’s report draws the wrong conclusions. This matters because, as a report in January from the think tank The Institute for Public Policy Research highlights, the Government should develop more policies that meet the needs of the growing numbers of micro-businesses. As the IPPR and RSA reports conclude, the Government should accept this is not a cyclical change but a structural shift in the way many people work and develop appropriate policies for them.

This is unlikely to happen while politicians try to spin the changes to fit their own agenda by presenting them as part of a resurgence in small businesses in the way we once knew them. What is happening is far more complex and interesting than that.