Pathways to employment: the role of small businesses in employing the unemployed

and inactive

Commissioned by the Federation of Small Businesses

28th November 2013The Labour Force Survey: past, present and future

Franz Buscha and Peter UrwinCentre for Employment Research

University of Westminster

Background and Introduction

• Research looking into role small and large businesses play in employment generation (Neumark, Wall and Zhang, 2008; Anyadike-Danes et. al., 2009; Haltiwanger, Jarmin and Miranda, 2010).

• Smaller/younger (start-up) enterprises create more, but destroy more in any given time period. Underpinning net picture are larger gross worker flows for smaller firms.

• Little insight into possibility that small & large firms differ in ways other than size of operation/rates of churn. Comparing like-with-like.

• We use LFS data to move on from discussion of who creates the most jobs, to one of who gets the jobs that are created.

• Our approach is closer to literature on gross worker flows (Bell and Smith, 2002; Elsby, Smith and Wadsworth, 2010; Gomes, 2010)

• There are questions over the use of ‘number of employees in the workplace’ as a proxy for firm size, that we tackle in a separate technical note.

Data and Method

• 10 LFS waves of individuals, for five quarters in – o 2008 Quarter 4 - 2011 Quarter 1 (75,000)o 2005 Quarter 3 - 2007 Quarter 4 (98,000)o 1997 Quarter 1 - 1999 Quarter 2 (110,000)

• Aged between 16 and 65, and drop 2.5% who do not have detailed economic activity information.

• Weights used in transition tables and regression, and panel is balanced (sample selection issues).

• Create transition tables, mapping initial activity status in wave 1 to recorded state in wave 5.

• Multinomial logit is then used to model destinations, conditional on initial destination state.

• Different firm size categories (micro, small 11-49, medium 50-249 employees and large 250+) are the focus.

Transitions into private sector employment• Elsby, Smith and Wadsworth (2010) 30-year average 597,000

Unemployment to Employment transitions; 1,475,000 nonparticipation to employment.

• 2008-2011 figures: As percentage of all moves from unemployment to employment in the private sector; micro-enterprises (24%); small businesses with 11-49 employees (27%) and firms with 50 to 249 employees (20%) [71% total].

• Self-employment 17% [all together 88%].• Firms 250+ employees account for approx. 41% of stock of all private

sector employment.• Nonparticipation to employment in the private sector: micro-

enterprises (29%), small businesses with 11-49 employees (30%) and firms with 50 to 249 employees (17%) [76% total].

• 95% of the nonparticipants making transition to employment do so by either self-employment or becoming an employee in SME.

Multivariate– does small firm effect remain?• Is there small-firm effect, or simply about volume (need to ‘deal

with’ issue of churn)?• Multinomial logistic regression (cluster standard errors and

weights) for all individuals observed transiting into one of our categories of firm size, conditional on wave 1 status.

• Firm size groupings are dependent categories and model transitions into these different firm-size categories using a range of covariates.

• We include age, sex, ethnicity (though only white/non-white distinction), disability status, martial status, education (though only degree/not degree), dependents, full-time/part-time working, occupation, industry sector, region and [the variables of interest] whether the individual is employed, unemployed or inactive.

Multivariate– does small effect remain?• Multinomial logit for all individuals transiting into categories of firm size, from any

category of activity or inactivity. Significant at 0.1% level……• Unemployed [relative to employed wave 1] who make a transition to employment

[wave 5], 30% less likely to do so by securing employment in firms with 250+ employees, relative to category of micro-businesses.

• Nonparticipants [relative to employed wave 1] making a transition to employment [wave 5], 65% less likely to do so by securing employment in firm with 250+ employees, relative to micro-businesses.

• Unemployed [relative to employed wave 1] who make a transition to employment [wave 5], 22% less likely to do so by securing employment in firms with 50-249 employees, relative to micro-businesses.

• The smaller a firm, the more likely we are to see the unemployed and nonparticipants securing employment.

• Effect does not seem to be driven by other factors (industry, occupation, region etc.).• Greater propensity of small firms to take on the unemployed and nonparticipants, as

a proportion of their inflow.

Challenge to this…… • Brown et al. (1990)….on average jobs created in smaller firms do not last as

long, lower wages, lesser terms/conditions, not as much training etc. • Equation for all individuals who are employed in private-sector firms of

different sizes in the first period of our analysis, with dependent categories as the destination states of (i) unemployment and (ii) nonparticipation.

• Employees in micro-businesses 6.5 times more likely than employees in firms with 250+ to transit to unemployment and nonparticipation (sig. at 0.1%).

• To what extent can we distinguish:• Smaller firms take on more employees with characteristics that put them

at higher risk of unemployment/nonparticipation,• Smaller firms have higher rates of destruction, and no matter what

individual characteristics, prob. of unemp/nonparticipation is higher.• Shed some light: model separate equations for each firm size, and consider

sig. of characteristics in determining unemp./nonpart. probability in each.• No sig. difference between most coefficient estimates (confidence intervals

overlapping), but pattern of higher probs for all in smaller – bit of both?

Policy implications

• Pursue mechanisms that offset the implicit incentives in many policy initiatives to work with larger firms.

• Various aspects of the Youth Contract aimed at smaller firms.• But more fundamental, is there a case to be made that the less formal

approach to employment relations in small firms is key to their openness to groups who have problems securing jobs in more formal settings?

• Moule, 1998; Ram & Edwards, 2003; Foster and Harris, 2005; Forth, Bewley and Bryson, 2006; Urwin, 2011 - small firms less formality, more fluidity and greater flexibility. More ‘contingent and fluid’ approach to employment relations.

• Present approach to employment relations (replacing industrial relations, with individual rights) not a good ‘fit’ to small firm environment.

• Problem is proving any causal link….• At the very least, may be sensible to complement Leitch-centric approach.