Chapter 3 - Small business and employment
...small
firms do not set out to create employment; they take on employees out of
necessity...it is not the number of small businesses or the jobs they create that
is important but the quality and durability of both the business and the jobs.[1]
Small business employment in perspective
3.1
Small business has made a major contribution to
employment growth in Australia,
as in other OECD countries[2]
over the past two decades. This has generated a focus on the potential of the
sector as an important source of new jobs. Increasing employment in small
business should not, however, be an end in itself but rather a means of
achieving the broader objective of increasing the number of quality and durable
jobs in the economy as a whole.
3.2
Small business, collectively, is the largest
private sector employer in Australia. In 2000–2001, out of a total of 6.9 million people employed in the
private sector (outside of agriculture), 3.3 million or 47 per cent were
working in small business either as employees or business operators. More than
a third of these were business owners or operators (‘own account workers’ or
partners in employing businesses). The remaining two thirds, were employees of
small business, with most of these employed in businesses with more than four
employees.[3]
It is apparent from these figures that self-employment is a major feature of
the small business sector in Australia.
3.3
Medium and large business, however, employs more
than 60 per cent of the employees (that is excluding owner-operators) in
the non-agricultural private sector. Almost half of these were employed in
large businesses, that is those employing 200 or more people. The relative
employment contribution of small, medium and large business is illustrated in
the following two charts. The first chart shows the total number of people,
including small business owners, employed in each category of business; the
second shows the total number of employees (that is excluding business
owners) in each category.
Figure 1—Total Employment: small
medium and large business |
Figure 2—Employees only: small, medium and large business |
|
|
|
[Data source: ABS, Number
of Businesses and Employment by Size of Business, Industry Overview, 22 January 2002, pp.
1–2]
Trends in small business employment
3.4
From the mid-1980s to mid-1990s, small business
accounted for a disproportionate share of new jobs (53 per cent of new jobs,
out of an employment share of 47 per cent) and, as a result, increased its
share of employment.[4]
Similar trends occurred in other OECD countries inspiring a new interest in
understanding the small business sector and its role in economic and employment
growth, particularly in the ‘new’ or post-industrial economy.[5] Over
the 17 year period 1983–84 to 2000–01, the average annual growth in employment
in small business was 3 per cent, higher than the combined average growth rate
in medium and large business of 2.5 per cent.[6]
However, for the three years 1997–98 to 2000–01, when employment growth in
small business began to slow, the average annual growth in small business
employment fell to 2.5 per cent.[7]
Employment growth in large business outpaced that in small business in the past
few years.[8]
3.5
Interpreting employment trends in small business
is complicated by ‘category shifting’. Category shifting occurs when a small
business increases its employment to the point that it moves into the category
of ‘other business’ (20 or more employees) or when an ‘other business’
decreases its employment to fewer than 20 employees. Small business employment
can therefore increase as a result of additional employment being created by
small business or downsizing or disaggregation by larger businesses.[9]
3.6
Employment growth in small business is therefore
not necessarily a positive indicator because it may be the result of other,
less desirable, changes in the economy. For example, the small business share
of employment tends to increase in times of recession, sometimes quite sharply,[10]
due to labour shedding by larger businesses along with a tendency for small
business to reduce staff hours rather than staffing numbers in times of
economic downturn.[11]
There is also the tendency for small business to function as a
‘labour sponge’[12]
or haven from unemployment.
3.7
Other structural changes in the economy and the
labour market can also have an effect on small business employment share.
Outsourcing and downsizing by both government and large private sector employers
and the growth of the non-standard workforce have both contributed to a shift
towards self-employment and growth in the business services segment of small
business. Technological change, including the advent of the internet and
powerful personal computers has altered the costs of production in some
industries and also opened up new opportunities for small business to service
more dispersed markets. In other industries, including grocery retail and some
of the motor trades, the increasing concentration of large business has led to
a reduced small business employment share.[13]
3.8
The OECD, noting that the size of the average
enterprise has decreased in recent years, has speculated that the increasing
employment growth in small and medium enterprises since the 1980s may reflect
fundamental structural changes in developed economies and the emergence of the
‘new economy’.[14]
Another view is that the changes are temporary and ephemeral, reflecting a
phase in the economic cycle. This is supported by evidence that, over the
longer term, the small business share of employment has remained relatively
stable, as well as a recent slowing of small business employment growth.[15] The Australian experience over
the past two decades appears to offer some support for this view: the
proportion of businesses with less than five employees has not changed in the
sixteen years between 1984 (when it was 81.47 per cent) and 2000 (when it was
81.46 per cent).[16]
ABS data for 2001 also highlight the fluctuating
nature of employment trends in small business over time: for example, the
number of non-employing businesses decreased between 1997–98 and 1998–99 and
then increased each year from 1999 onwards.[17]
3.9
This analysis underlines the need for caution
when drawing any hard and fast conclusions from the recent slowing in the
growth of small business formation and employment.
Between 1997–98 and 2000–01, the average annual growth in the number of small
businesses was 2.7 per cent, below the average annual rate of 3.5 per cent for
the period 1983–84 to 2000–01; and, as noted, total small business employment
increased at an average rate of 2.5 per cent compared with an average of 3 per
cent over the period 1983–84 to 2000–01.[18]
The slower growth in small business employment appears to be mainly the result
of a slower growth in the number of employers and own account workers in small
business, as the growth in small business employees was on a par (0.1 per cent
below) with the 17 year average.[19]
There could be several explanations including a move out of ‘involuntary’ self-employment
in a more favourable employment market. Another possibility is that deeper
structural changes in OECD economies such as Australia may be eroding some of the advantages enjoyed by small business,
particularly in the services sector, during the 1980s. For example, in the USA and Japan larger businesses have started to increase their share of the
services sector at the expense of small business.[20] An analyst has suggested that,
in the USA, the long-term small
business share of total employment will soon settle to about the
same level as in the 1960s.[21]
3.10
The point of this analysis is to underline the
complex factors that play a role in determining overall employment levels in
the small business sector, including structural changes in the economy, and our
limited understanding of how these operate. This implies the need for a degree
of caution about the scope for government policies or interventions to increase
employment in small business, other than at the margins, as well as the need for
a better information base. The Productivity Commission report on small business
employment put it this way:
It is...therefore a true, albeit glib, assertion that if every
small business took on one more employee, there would be no unemployment
problem. But this sort of simple arithmetic ignores more fundamental and
interesting questions about the role of small business in employment
generation...[it] may be due to shifts in demand for services where small
business has a comparative advantage.[22]
3.11
The Office of Small
Business in its submission noted that ‘there has been limited research on the
factors that affect small business employment and barriers that prevent small
business taking on new employees’.[23]
The Business Growth and Performance Survey, known collectively as the Business
Longitudinal Survey, which was conducted from 1994–95 to 1997–98, was partly
designed to remedy that deficiency. The survey captured information on the
growth and performance of Australian employing businesses along with selected
economic and structural characteristics of those businesses. Information from
the survey has been used by Austrade to develop a better understanding of the
export performance of small business and by the Office of Small Business to
identify the extent to which new and existing businesses are responsible for
generating employment.[24]
3.12
Although it has
been a valuable source of information on small business, the survey was
discontinued in 1999. At the time small business advisers, including CPA
Australia, argued that the decision was short-sighted because of the unique and valuable data about small business the survey
provided. CPA Australia commented that:
If the BLS is axed we must expect that in future businesses will
suffer from poor and ill-conceived policy decisions...small business performance is likely to become a guessing game.[25]
3.13
In
response to a question on this issue from the committee, the Productivity
Commission advised that the survey, while involving a higher compliance burden
than many other surveys, provides some useful insights into business dynamics
and overcomes the problem of ‘category shifting’. The Commission also noted
that the survey had been designed to minimise compliance costs as far as
possible. In summary, it advised that:
Overall, the BLS has proved to be a useful survey that has been
‘mined’ by public sector and university researchers for some rich insights into
business dynamics. Clearly the dataset is now somewhat dated, though it is
still being used. A further similar survey would enable examination of
contemporary issues and has the potential to make a significant contribution to
the analysis of many policy-related matters.[26]
3.14
The committee
acknowledges that surveys can add to the paperwork burden on small business and
should only be undertaken where the benefits clearly outweigh the costs.
However, in view of the significant potential for a survey of this kind to lead
to more informed policy formulation, including for strategies to increase
employment in small business, the committee considers
that the survey should be resumed, in close consultation with the small
business community to ensure that any compliance burden is minimised.
Recommendation Two
The committee recommends that the Commonwealth Government resumes
the Business Longitudinal Survey, in close consultation with the small business
community.
3.15
Following sections of this chapter assess the
views presented to the committee on factors that could provide more favourable
conditions for employment growth in small business.
Characteristics of employment in small business
3.16
When assessing small business’ contribution to
employment, it is also important to consider the nature and quality, as well as
the number of jobs. Lower quality jobs can act as a brake on employment growth
in the longer term because they may restrict the capacity of small business to
recruit and retain skilled employees. This can, in turn, reduce productivity.
Key elements of job quality include job security, skill levels, wage rates,
employment conditions, and training and development opportunities.
3.17
Employment in small business, like small
business itself, can be highly volatile. New businesses account for almost half
of all the jobs created by small business. As a result, job security can be
very limited, particularly in the years soon after business formation when the
risk of business failure is relatively high. Measures that would promote more
sustainable small businesses can therefore contribute to more durable jobs.
3.18
Jobs in small business have generally been
considered to be of lower quality than jobs in large businesses.[27] The ACTU submitted that
employees of small business are generally paid 34 per cent less than those in
large firms.[28]
A community-based organisation in regional Western
Australia told the committee that:
The quality and sustainability of employment created by small
business particularly in smaller rural communities is tenuous at best and is
often casual or part-time dependent on seasonal conditions. Even in larger
centres where work is often slightly more secure the employment opportunities
can still be casual or part time with jobs that are low skilled or have limited
career potential.[29]
3.19
There could be several reasons for this,
including the greater reliance of small business on awards for setting terms and
conditions of employment, the prevalence of low skill jobs and the limited
financial resources of many small businesses. By definition, small business
generally offers less scope for career development and progression than large
business.
3.20
At the same time, there are also many well-paid,
highly skilled professional and trades jobs in small business, for example in
pharmacies, engineering firms, consultancies and information technology firms.
Small businesses that export regularly are likely to pay higher wages and
provide better terms and conditions than other small businesses.[30]
3.21
Employment practices and relations in small
business have been characterised as personal, informal and less sophisticated
than in larger business, reflecting the lack of management layers, the small
size of the workforce and owner’s personal involvement with all aspects of the
business. Small business owners also have high expectations of their employees:
they expect their employees to contribute a similar level of loyalty, commitment
and work ethic as they do.[31]
One submission noted that:
In small business, every employee plays a significant role and
has a real impact—positive or negative—on business performance and, therefore,
is vitally important. On the other hand, employees want the best return from
employment. They may see multi-tasking as a burden, and they often do not see
small business employment as maximising their potential; it is rarely their
first choice.[32]
3.22
These high expectations are not always matched
by a capacity to offer a competitive remuneration package, and this can make it
more difficult for small business to attract and retain staff. On the other
hand, the more personal management style of small business can be an attraction
for some employees. CPA Australia argued that small business needs to
capitalise on its capacity to offer staff more flexible employment conditions,
such as flexible hours, family friendly environments, job sharing, training and
development opportunities, equity incentives, management responsibilities and
succession options. Their recent survey of small business suggested that there
is a trend in this direction.[33]
3.23
The committee notes in this context that a
universal, government-funded paid maternity leave scheme could benefit small
business by enabling it to match an important benefit offered by many larger
employers, at no significant cost to the business. While
employees of small business are already eligible for the standard period of
unpaid maternity leave, small businesses and their representatives made it
clear to the committee that they do not have the capacity to cover the costs of
an employer-funded, paid leave entitlement. One consequence is that, as
more large and medium employers begin to offer paid maternity leave, small
business may be left behind and become less attractive as an employer. The
committee was told that Business and Professional Women Australia supports a
universal, government-funded maternity leave scheme as a means of ensuring that
all working women, including the self-employed and small business employees,
have access to paid maternity leave.[34]
3.24
Training and development opportunities
contribute to both the quality of jobs and the level of innovation and
productivity in the business. But small business is dramatically under-represented
in formal training: 10 per cent of micro-businesses, which account for the
lion’s share of employment in small business, undertook formal training in the
late 1990s compared with more than 80 per cent of large businesses.[35] Small business is more
actively involved in informal training,[36]
and this may be an appropriate outcome for some small businesses that are based
on a ‘low cost, low skill’ business model. For many other small businesses,
however, survival and growth will depend on their capacity to innovate and
continually increase productivity, in order to remain competitive. Training,
both formal and informal, will play an important role in this area. This issue
is discussed in more detail in Chapter 5.
3.25
There has been a trend towards casual employment
in small business over recent years. CPA Australia’s survey found that 35 per
cent of small business employ casuals and 24 per cent of these will employ more
next year. A range of reasons was mooted, including the desire to avoid
coverage of unfair dismissal laws, but the most common motivation appears to be
a desire for flexibility and the capacity to adjust employment and costs in
line with fluctuating demand and turnover.[37]
This is in line with the general evidence from small business people and their
representatives. At the same time, many small businesses recognise that too
great a reliance on casual labour can adversely affect business performance.[38] A representative of the
Melbourne West Consultative Committee told the inquiry that:
...a number of small business responses indicated that they needed
to employ more casual labour and subcontractors because they needed the labour
flexibility to try and maintain or control costs. However, quite a number of
respondents said that they were not interested in employing casuals or
contractors and that it was very important for them to have full-
time, permanent staff because they were concerned that they
maintain their skills and produce quality products. I think that was quite an
interesting finding: the tension between those two.[39]
3.26
There is some evidence that small business
over-estimates the flexibility and cost savings associated with casual
employment, because of a misunderstanding of employment obligations owed to
casual employees. CPA Australia suggested the development of tools that would
enable small business to make more informed cost-benefit calculations of
various forms of employment.[40]
3.27
A witness from Business Enterprise Centres in South Australia (BEC SA) gave an
interesting illustration of the role that job quality can play in employment
and productivity in an industry. Employers in the market garden industry north
of Adelaide have been trained
in human resources management and ways of restructuring jobs to provide
full-time employment. The project shows promise of overcoming the staff
shortages that have plagued the industry because of low pay and poor employment
practices.[41]
Comment
3.28
The committee believes that the quality of the
jobs in small business is as important as the number of jobs created. Many
small businesses are unable to offer the same wage rates or employment
conditions as larger businesses. However there is scope for them to improve the
quality of jobs through measures such as more flexible working conditions,
better training and job design, and reduced reliance on casual employment.
Better quality jobs have the potential to enhance small businesses’ capacity to
recruit and retain skilled staff, increase their productivity and performance,
and thus generate more sustainable employment. Government could assist in a
range of ways, including developing information and training for small business
on the relationship between job quality and productivity. Specific measures
such as a tool to assist small business to assess the costs and benefits of
different employment options, as suggested by CPA Australia, should be
considered.
Recommendation Three
The committee considers that the governments should promote
awareness among the small business community of avenues open to them to improve
business performance and to enhance their attractiveness as employers through
improving the quality of jobs without necessarily adding to costs.
Factors that influence employment in small business
3.29
Several surveys in recent years have reported on
small business employment intentions. These include the Yellow Pages survey of
small and medium business by Pacific Access, the employment survey of small
business and their accountants by CPA Australia, and the business survey by the
Australian Chamber of Commerce and Industry. As the results have been canvassed
widely in the media and in the context of debates on unfair dismissal laws,
this report will not attempt to recover the same ground, although may draw on
some of the survey findings as appropriate. As a general caveat, the committee
notes that the main evidentiary value of surveys is to provide a snapshot of
small business opinions.
3.30
A clear message from all surveys and from
evidence presented to the committee is that, while the factors that determine
employment trends in the small business sector are complex, business growth is
an essential precondition.[42]
Business growth
3.31
Like business everywhere, small business will
generally only employ more people either in response to, or anticipation of,
increasing sales or profitability. The Yellow Pages survey identifies a lack of
sales or demand as the most important impediment to increasing employment and
as a key factor in decisions to reduce staffing.[43] Sales, profitability and
productivity are in turn dependent on a range of other factors including the
economy and the regulatory environment as well as the skills of the owner and
employees. Growth prospects also depend on factors specific to industry
sectors.
3.32
Evidence to the inquiry suggested that
businesses in labour-intensive industries dominated by small firms, such as the
restaurant and catering industry may be more likely to translate any increase
in sales or profits into increased employment.[44]
Small businesses in competitive environments with price-driven markets, such as
the grocery retail sector, may have limited scope to grow their profits and
therefore employment.[45]
The National Association of Retail Grocers
of Australia (NARGA) cited research from 1999 indicating that, in the retail
grocery sector, for every job that is created in the major retain chains, 1.7
jobs are lost in the independent retail sector, presumably because small
grocers, lacking the economies of scale of the majors, are more
labour-intensive businesses.[46]
The increasing market concentration of the major chains therefore has an
adverse effect on employment levels overall as well as employment in the small
business sector.
3.33
Cost structures are also important. Tenancy
costs are a major cost item for retailers, particularly those in large shopping
centres. The Australian Retailers’ Association (ARA) submitted that these costs
have increased significantly in recent years, particularly for small,
speciality retailers, as the result of what they describe as a monopoly hold on
shopping centre development by the major shopping centre developers. The ARA
estimates that the higher tenancy costs translate into a loss of between 11,000
and 30,000 jobs.[47]
3.34
Government policies and regulation can influence
cost structures and business profitability in a range of ways. Compliance costs
associated with government regulation add to the costs of doing business and
reduce profitability, particularly where businesses are unable to pass on the
additional costs. As previously mentioned, a recent CPA Australia survey of
identified compliance costs as the greatest risk for business profitability.[48]
3.35
A witness from the Council of Small Business Organisations of Australia (COSBOA) explained how the compliance costs associated
with the GST affect employment, particularly for small businesses employing
three or four people, where:
...the key man should be out there getting work, ensuring he has
got continuity of work for employment. This links back into employment. The
only way he can be guaranteed of employing people is by guaranteeing a flow of
work. The best way that a key man in a small business can guarantee a flow of
work is by not being diverted by unnecessary administrative things. The small
business community has been made a tax collector and the burden falls more
heavily on them. This is why COSBOA is suggesting that they get to keep some
percentage of the GST—I think they have mentioned 2½; I have just forgotten—to
recognise that difference.[49]
Growth aspirations and business
management expertise
3.36
Many witnesses argued that the management skills
or capacity of the owner is the main determinant of business growth. These
comments from the Far North Queensland Area Consultative Committee are typical:
...the key factor that prevents small businesses from employing
more people is simply the lack of ability of small businesses to reach their
true potential in production and profitability. This lack of ability stems from
small business owners and managers lacking the skills and discipline to manage
the more administrative side of their business as distinct from the technical
side...Out of 400 business people counselled an estimated 90 per cent of these
were struggling with their businesses because of a lack of
strategic planning.[50]
3.37
Witnesses who took this view, including the
Canberra Business Council, argued that the best way to encourage increased
employment by small business is for governments to support programs to enhance
the general business skill levels of small businesses: ‘This means government
support through appropriately delivered programs of financial management,
marketing and other specific business skills’.[51]
3.38
Participants in a
roundtable discussion between the committee and small business advisers and
counsellors took a similar position:
Mr Peters...The common
denominator of all of these failings is the business principal’s lack of
skills. If I were to invest my time and effort, I would invest it first in the
business principal before anybody or anything else. If you want change, you
start from the top.
CHAIR—Do you all agree with that?
Mr Small—Yes, definitely.[52]
3.39
These views are supported by
research on small business development. An OECD study of Small and Medium
Enterprises (SMEs) and employment concluded that governments need to explore
ways to encourage entrepreneurial activity and promote training to maximise the
employment and growth potential of the sector.[53]
The 2001 Global Entrepreneurship Study of Australia found that education, along
with experience, is considered to be the main way to improve entrepreneurial
capacity.[54]
3.40
Not all small businesses have the desire and
capacity to grow, even given the necessary management expertise. According to
the Yellow Pages surveys, there is a strong, although not determinative,
relationship between business growth aspirations and employment growth: some
small businesses with no growth aspirations do increase employment.[55] Mr Brian Gibson stated that a significant
proportion of small businesses choose a ‘capped growth’ path and will not grow
their business (or employment) beyond a set target under any conditions.[56] This may reflect a preference
for independence, both from financial accountability to lenders or investors
and from management responsibilities:
They do not like an employer-employee relationship, so they seek
to break out of that by going into business and maintaining
independence.[57]
3.41
The witness from Pacific Access argued that
addressing the impediments to employment growth for these companies can be
futile because:
They are in business for family, lifestyle, social, working-hour
issues—a whole range of things. The issue that I really wanted to stress in
part today is that you have to understand the mindset of those businesses,
otherwise, if you are trying to apply certain filters over that and trying to
interpret what the key employment barriers are, you may come up with the wrong
conclusions, because they do not want to grow.[58]
3.42
Similarly, the Business Enterprise Centres
(BECs) in Western Australia, argued that government policy should recognise
that few small businesses will actively seek to employ large numbers of workers
and most will be focused on life-style rather than growth: ‘Attention should be given to encouraging
those enterprises that have the potential for growth and therefore employment.’[59]
Proportion of businesses seeking
growth
3.43
The committee heard varying estimates of the
proportion of small business with the aspiration and capacity to grow.
3.44
On one academic model of small business growth,
small and medium businesses can be classified into three main growth paths:
- Traditional SMEs: these follow a low growth path and generally
have few if any growth aspirations and exist principally to provide their
owners with a source of employment and income (70 per cent of small and medium
enterprises).
- Capped growth SMEs: these follow the moderate growth path. Growth
is often capped to the point that limits dependence on external financing (25
per cent of small and medium enterprises).
- Entrepreneurial SMEs: these follow a high growth path and are
often associated with entrepreneurial attitude and technical and commercial
innovation (5 per cent).[60]
3.45
Of the 61 businesses surveyed by the West
Melbourne Area Consultative Committee, 87 per cent indicated that they had not
changed their employment mix in recent years,[61] suggesting that only 13 per
cent had grown. CPA Australia interpreted its survey results to suggest that:
...about 18 per cent of small businesses have the capacity to
grow; closer to 40 per cent or 50 per cent will not grow, no matter what. In
our survey, 10 per cent of businesses said that they would not employ—nothing
would make them employ and they had no intention of ever employing.[62]
3.46
The Pacific Access survey results suggest that
around 50 to 60 per cent of small and medium businesses are seeking growth of
some unspecified kind and that these are more likely than other businesses to
be increasing employment, as the following table illustrates:[63]
TABLE 2—Impact of
SME Growth Strategies on Employment Trends (1998 to 2002)
|
Period
|
May 1998 |
August 2000
|
May 2002 |
|
Employment Trend
|
Up |
Down |
Total |
Up |
Down |
Total |
Up |
Down |
Total |
|
SMEs seeking growth
|
79% |
51% |
61% |
66% |
52% |
51% |
77% |
51% |
61% |
|
SMEs not seeking growth
|
21% |
49% |
39% |
33% |
45% |
48% |
23% |
49% |
39% |
3.47
The spread of results from these surveys and
other sources suggests that anywhere up to 50 per cent of small business are
likely to grow to some extent, albeit growth may be quite limited in many
cases. Conversely it appears that around half or more of small businesses are
unlikely to grow under any circumstances. These are likely to be those on the
moderate or capped growth path which have reached a set limit.
3.48
High-growth businesses, sometimes known as
‘gazelles’ are an important subset of growth-oriented businesses and, along
with new small businesses, known as ‘mice’, are considered responsible for most
of the employment growth in the sector. Gazelles are estimated to represent
usually 5 to 10 per cent of small business but have a disproportionate impact
on employment growth in the sector.[64] No definition of a gazelle or
high growth firm was presented to the committee, although an international
study suggests that ‘high growth start-ups’ are likely to employ 50 people
within five years.[65]
A recent survey estimated that 5 per cent of Australian start-ups are in this
category, which places Australia fourth in an international ranking of this dimension of
entrepreneurship.[66]
Implications for policies aimed at
employment growth
3.49
International research
indicates that, across the board, most of the employment growth in small
business comes from the formation of new firms and the expansion of the small
group of high growth firms. At the same time, the picture may differ
significantly from region to region, so that in rural or remote areas, for
example, existing businesses, that are not necessarily high growth, may make
the greatest contribution to employment. There are various points at which
management support may be useful.
3.50
Several witnesses suggested that a focus on high
growth firms is likely to generate the greatest benefit in terms of employment
outcomes.[67]
This assumes that they can be readily identified. Evidence to the committee on
this matter suggested that this is not easy to do. Mr Brian Gibson advised that he was not aware of
any reliable way of identifying these firms[68]
and considered there was a need for more research in this area. The Capital
Region Enterprise and Employment Development Association (CREEDA) also argued
for increased research to develop a better understanding of factors affecting
the growth potential of small business.[69]
3.51
Dr Tim Atterton told the committee that policy could also
usefully focus on a subset of business that is not realising its potential to grow substantially. There is, in his view, a significant
number of ‘growth’ or ‘premium’ small businesses in ‘steady state’ mode that
have the desire and capacity to grow but lack the management skills to achieve
their goals. These businesses need more management education and support to
help them overcome the barriers to sustainable growth.[70]
3.52
Another witness identified the need for support
to exporting businesses that reach a point where they must make careful
decisions about whether to expand their capacity in the hope of generating
additional sales.[71]
A small business adviser also identified the scope for increased growth in
those micro-businesses that are capped
‘simply because of incompetency’:
When I say that, I do not
mean it cruelly; I mean they just do not know how to do better. A lot of micro
businesses that I have come across would love to know how to grow, but they
simply do not and they live a life of frustration and misery, too often.[72]
3.53
Management or business development assistance
can help some businesses realise their growth aspirations. It can also help others that are on a growth path to
manage their growth successfully: the committee heard evidence from a number of
sources that successful small businesses may subsequently fail because of an
inability to manage growth.
3.54
Evidence from Austrade suggests that a focus on
small business with the capacity to export also has the potential to grow
employment. Small and, in particular, micro-businesses are now entering the
export market more rapidly than medium or large exporting businesses. Austrade
research indicates that increasing the numbers of these businesses will mean
more small businesses with better growth prospects and an enhanced capacity to
create more jobs.[73]
3.55
According to the Business
Longitudinal Study for 1997–98 (latest period for which data is available), new
businesses are responsible for almost half (46 per cent) of all employment
generated by small business: 224,000 jobs in 1997–98.[74] One policy implication is that strategies for increasing
employment in small business need to have a strong focus on facilitating the
formation and survival of new small business.
3.56
Taken together, the evidence seems to suggest
that a multi-pronged approach may be necessary to reflect the various paths to
growth and the areas of untapped potential in small business. In similar vein,
a witness argued the need to recognise that enterprises grow—and therefore grow
employment—in three ways:
- new enterprises starting up which are taking advantage of
sustainable competitive advantages such as natural or cultural assets;
- expansion of existing enterprises; and
- small business that kick forward because they are able to tap
into national or international markets.[75]
3.57
Different forms of intervention may also be
necessary to help realise small business potential. The Western Australian
Business Enterprise Centre suggested that industry development strategies
should form part of government approaches to increase employment, particularly
in regional areas, where small industries dominate.[76] A number of witnesses
highlighted the benefits of strategies such as the development of business
clusters and networks. These can take different forms from general information
sharing to closer collaboration between businesses to pool expertise and
capacity as a means of generating efficiencies or servicing new markets. OECD
research suggests that clusters and networks offer significant promise as a
means of promoting innovation and enterprise development in small and medium
enterprises.
Comment
3.58
The evidence on the growth potential of small
business, like much else in small business, presents a very mixed picture. The
consensus of opinion among academics and those working with small business
suggests that a proportion of small business has no intention of growing
employment, or expanding beyond certain limits, although it is difficult to
estimate the precise size and characteristics of this segment. One implication
is that extreme care needs to be taken in extrapolating the results of surveys
of employment intentions from a sample of small businesses to the sector at
large. The evidence also suggests that government assistance in developing the
management expertise of small business and through industry, regional
development and export initiatives, and in reducing the burden of compliance,
may assist small businesses to realise their growth potential. The different
needs and circumstances of small business, and the range of paths to growth,
will require a diverse range of assistance mechanisms and greater flexibility
within business support programs to accommodate these needs and circumstances.
Barriers to employment
3.59
The full employment potential of businesses with
growth aspirations and capacity may not be realised if there are barriers to
employment. According to Pacific Access, companies with growth aspirations are
more likely to identify impediments to employment,[77] presumably because they
satisfy the other preconditions for employment growth. Pacific Access submitted
that the government should give greatest weight to the issues and concerns of
growth-oriented businesses and focus on the key barriers they have identified,
mainly lack of sales and finding suitable staff.[78]
3.60
A similar approach was taken by Mr Brian Gibson who argued
that:
While business owners may express concern about issues such as
employment it is unlikely that correcting the problems will result in significant
changes in employment levels. The problems identified by small firms are
undoubtedly identified in good faith. However while they may inhibit additional
employment at the margin or encourage an alternate employment mix (full time or
casual), they are unlikely to overcome the capped growth approach to business
operations that is so dominant in the sector. Even if all the apparent barriers
to employment were removed, the vast majority of small firms in Australia would
not actively pursue growth resulting in employment generation. [79]
3.61
With those caveats in mind, evidence to the
committee identified a number of impediments to employment across the sector.
These generally included both external and internal factors. One list
comprised:
- time-poverty—this is where government regulation really hits;
- limited access to personal and investor capital;
-
uncertain cashflow streams—this is amplified in regional
economies by fluctuations in commodity markets;
- a shortage of skilled tradespersons and professional skills;
- the costs of employing, including recruitment, training, leave
and conditions, insurance and superannuation, and payroll tax;
- the potential negative consequences of employing staff if
problems arise;
- a shortage of the enterprise skills required to grow businesses;
and
- limited or inadequate regional infrastructure, particularly
constrained electricity and water networks, lack of filtered water, lack of
piped gas, and sub-standard telecommunications services.[80]
3.62
Other submissions identified the costs involved
in bringing infrastructure up to an acceptable compliance and quality standard,
particularly in industries that are capital intensive or dependent on
specialised equipment, cash flow, technology, management skills and the costs
of factory/office space.
Regional development
3.63
Chapter 2 noted that location can play an
important role in determining the growth prospects for small business. In
regional areas the fate of the region and its small businesses are closely
intertwined. Submissions from the southwest of Western
Australia highlighted the difficulties facing small
business in a region where agriculture has suffered a severe downturn in recent
years. The market and profit margins for small businesses had been reduced as a
result. Some submissions argue that rural small businesses should be eligible
for income supplements or assistance on a similar basis to agriculture in such
circumstances. Others
highlight the potential for various interventions, such as clustering and
mentoring, to assist rural small business to develop new or substitute markets
or improve profitability and viability in other ways. The common message was
the need for some form of assistance to non-agricultural small business in
agriculture-dependent regions experiencing drought or serious downturn, as a
complement to assistance provided to agriculture.
3.64
Many submissions also emphasised that higher
cost structures and limited infrastructure in many parts of regional Australia are impediments to small
business growth. This can further constrain economic growth in the region.
These submissions argued for increased government investment in regional areas,
in both physical infrastructure and education and training opportunities, to
provide a more favourable environment for small business growth. The committee
notes that the Regional Business Development Analysis currently in progress
will be examining the options for development of sustainable regional
businesses.[81]
Access to finance
3.65
Although access to finance did not figure as one
of the most prominent issues in the inquiry, lack of access to finance on
reasonable terms is clearly a growth inhibiting factor for many small
businesses. Access to start-up capital is a particular problem for those
business intenders who lack the capital or resources to secure against
borrowings. This issue is discussed in more detail in Chapter 4.
The effect of regulation generally,
including cash flow issues
3.66
Regulation can affect the capacity of small
business to employ more people in several ways. Funds spent on compliance can
affect cash flow and reduce profit margins, making businesses more wary about
absorbing additional costs. Compliance with regulations is seen as an
‘unproductive’ activity which eats into managers’ time. One business proprietor
singled out the effect of the GST, and the requirement to pay out money that
has not been yet been collected:
In terms of cash flow—and I know one of the terms of reference
for the inquiry was about small businesses’ ability to employ people—if you are
constantly struggling with your cash flow, your ability to employ people is
crippled because you think, ‘Sure, I’ve got the business, I’ve got enough work
to take on an extra person but I’m not sure that I’m going to be able to pay
them. My cash flow is on a roller-coaster ride because I have to pay out money
I haven’t collected.[82]
Recruitment-related issues
3.67
Surveys consistently find that small business
has difficulty recruiting staff with the appropriate skills and attitudes. This
maybe the single greatest impediment to increased employment by those
businesses with the desire and capacity to grow. According to CPA Australia
estimates, a shortage of skilled and motivated employees is an impediment to
employment growth in 52 per cent of small business.[83] Various reasons are suggested.
One witness noted that ‘for the right people, there is no career path, so
attracting good people to small business is an inherent problem in the first
place’.[84]
Another submitted that TAFE graduates, who provide the main pool of
potential employees, lack the required level of skills, implying a training
deficiency.[85]
3.68
The reluctance of small business to invest in
training, and a preference for employees who are fully trained, can also act as
a brake on employment, as the pool of such employees is limited. CPA
Australia recommended more research into the employment needs
of small business and in particular the attributes and skills that small
business is seeking in its employees, and for these to be articulated to
schools and training providers.[86]
The committee considers that there is much merit in this proposal.
3.69
Current employment services arrangements are
also an impediment to recruitment, according to the Melbourne Development
Board, because the number of different employment programs and Job Network
providers presents a maze too complicated for many small businesses to
navigate.[87]
Restaurant and Catering Australia was also sceptical about Job Network's
capacity to meet its members' needs, suggesting that the agencies appeared to
concentrate on larger employers, who are presumably more profitable clients.[88]
3.70
Small businesses may also find it difficult to
recruit staff because they do not know how to accurately determine the skills
they require in an employee. This is not surprising: as noted, small business
managers have many roles and responsibilities but few have the specialised
human resources expertise usually found in the corporate areas of larger
companies. However, most industries have developed packages outlining the
competencies and key performance indicators that are needed for the major
occupations. These could be a very useful tool for small businesses in their
recruitment exercises. The committee notes that the
CPA Australia survey in March 2002 found that up to 75 per cent of small
business do have a list of the skills and qualifications attached to a job but
only 53 per cent have a written job description and 14 per cent were
dissatisfied with the last person employed.[89]
These findings suggest that, while there are many small businesses that use
best practice recruitment practices, a significant number could benefit from
improved focus on recruitment. Research on the recruitment needs of
small business should also examine the role of competency packages in assisting
small business to adopt more successful recruitment strategies.
3.71
The committee also heard evidence that skill
shortages in some regions and industries are acting as a brake on employment.
The Western Australian Branch of the Motor Trades Association of Australia (MTAA WA) stated that a shortage of trade skills is an impediment to
economic health of the automotive industry and must be addressed for small
businesses in that industry to remain viable.[90]
The Northern Territory Chamber of Commerce and Industry Skill also identified
skills shortage as an impediment to growth.[91]
3.72
The committee notes that the government reports
a number of initiatives to address skill shortages in particular industries and
that the Senate has asked it to conduct an inquiry into the general question of
skill shortages, which will provide an opportunity to investigate these
concerns.
3.73
Even when suitable staff can be found, small
business may baulk at employing because of the additional compliance
obligations and management responsibilities. According to the Canberra Business
Council, many home-based and micro-businesses with high growth potential are
therefore ‘caught in the nervous territory between whether they should or
shouldn’t employ.’[92]
Other witnesses emphasised that employing the first staff member is an enormous
step for small business because:
It increases overheads dramatically and requires the business to
comply with numerous acts and legislation. Many small business operators have
little or no experience of recruiting, supervising and managing employees. In
previous occupations they may have had interaction with their immediate
supervisor or manager but few have training, either formal or job specific, in
‘hiring & firing’ and the many associated areas. Anecdotal evidence in the
small business sector (1–5 employees) suggests that too often the decision to
employ someone is made with little consideration given to a range of issues
that impact on an effective employer–employee relationship.[93]
3.74
The scale and complexity of employment-related
regulations in particular can act as a deterrent to employment:
There is a growing number of home based businesses and there is
a growing number of owner-operators who are reluctant to take that next step of
becoming owner-managers and starting to employ people. There is a perceived barrier
there: the barrier of suddenly having to employ people. There is a whole heap
of regulations and red tape that they need to come to grips with. For me, as an
owner-operator, it is a lot easier to work 65 hours a week than to suddenly
take the next step and say, ‘Well, hang on, maybe I could work 35 hours a week,
grow the business a bit further and employ somebody.[94]
3.75
Many submissions identified the need for
assistance to small business to help them become ‘employer ready’.[95] This includes both general people
management skills, for example in recruitment, training and management of
staff, as well as assistance with identifying and understanding employer
obligations. The committee heard evidence that the Human Resource Advisory
service project funded by the South Australian government, which provided small
businesses with access to subsidised human resources advisers, has resulted in
a measurable increase in employment in small businesses using the service. The
Business Enterprise Centres of South Australia stated that:
The program has been an outstanding success with between one and
two jobs created with each consultancy and given small business the confidence
to employ more. Over half of the businesses surveyed after 3 months indicated
they intend to take on even more staff.[96]
3.76
Other suggestions include development of
software tools and manuals to help small business identify and work through
their employment obligations, as well as better access to advice, either
through e-mail, phone or in person.[97]
The Business Enterprise Centres of Australia (BECA) recommended that the
Commonwealth develop a training program on employing staff, to be delivered
through business networks, including accountants and the BECs, to assist small
business to engage more full-time employees.[98]
3.77
The committee is convinced of the need to
provide more assistance to small business to help it become employment-ready.
Many of the proposals made in the inquiry appear constructive and practical but
would require more detailed investigation as to their feasibility. The
committee therefore considers that the Commonwealth, state and territory
governments, ideally under the leadership of the Small Business Ministers
Council, should undertake research to identify the most appropriate measures. A
consistent, national approach should be adopted in line with the committee’s
general findings about the need for more coordination and integration of
government programs for small business. A broad range of small businesses and
their advisers, including Business Enterprise Centres, Small Business Answers
advisers and accountants should be consulted in the course of the research.
3.78
The issue of compliance obligations related to
employment is taken up in more detail in Chapter 6.
Recommendation Four
The committee recommends that the Small Business Ministers Council
commissions research into measures to assist small business to become
employment ready and to enhance its capacity to recruit appropriate employees
including, through identifying:
- the attributes and skills that small business needs in its
employees;
- ways in which the Job Network could better meet the recruitment
needs of small business; and
-
tools to assist small business make more informed decisions about
employment arrangements, including the basis of employment.
This research should include
consideration of how the competency standards and key performance indicators
developed by the Industry Training Advisory Bodies could be more effectively
used by small business in recruitment, training and performance management.
Costs of employment
3.79
The cost of employing staff was raised as a
deterrent to employment by a number of witnesses. Particular areas of concern
are the compulsory employer superannuation contribution, penalty rates and
payroll tax. Occupational health and safety standards and workers compensation
premiums are also factors that some small businesses see as deterrents. While
most small businesses accept the need for compulsory superannuation
contributions to provide for employees’ retirement, many are concerned that
under the current arrangements casual employees may have small amounts
accumulating in many different areas, undermining some of the objectives of the
scheme. There is also a common view among small business employers that
employees do not consider superannuation contributions as part of their total
remuneration. It was suggested that compulsory employee contributions might
result in a greater appreciation of the value of the employers’ contribution.
3.80
While payroll tax was not raised as a major
issue by most small businesses, it was raised as a concern by some interest
groups and some small businesses approaching the threshold at which exemptions
no longer apply. These comments illustrate how exemptions can function as a cap
on small businesses growing beyond a certain point.
Unfair dismissal laws
3.81
Unfair dismissal laws were raised by a number of
industry and business associations and small business people. However,
consistent with the results of the various surveys of small business,[99] they did not emerge as a major
point of concern or a determinant of employment. For this reason, and because
the issues have been extensively canvassed in other fora, the committee will
not deal with this issue in any detail. For a detailed discussion of the arguments
from both sides, readers are referred to Senate Employment, Workplace Relations
and Education Legislation Committee reports on the various bills proposing a
small business exemption from the Commonwealth laws. Unfair dismissal is
discussed in Chapter 6 on the effect of regulation on small business.
Comment
3.82
An employment creation strategy needs to be
based on an understanding of areas where intervention can be effective, of
where there is scope and motivation to increase employment. Evidence to the committee
suggests that the determinants of employment in small business are complex and,
as yet, not well understood. However business growth is clearly a key factor.
The most effective way to grow employment in small business is to focus on ways
to assist enterprises to expand to their full potential, whether through
developing individual capabilities or the overall capacity of an industry or
region. A focus on assisting new small businesses to
become sustainable enterprises is also likely to be effective, given the
significant contribution they make to the creation of new jobs in the sector.
Strategies that maximise the skills and capabilities of small business owners
and groups of small business are also valuable because, irrespective of any
contribution they may make to employment growth, they can contribute to the
development of a more productive, profitable and innovative small business
sector.
3.83
Growth aspirations and potential vary
significantly across the sector and the characteristics of the various segments
are not well understood. This limits the scope for extrapolating from survey
results on impediments to employment outcomes unless researchers can be
confident that the survey sample contains a representative selection of
businesses with various growth aspirations and capabilities. Effective
strategies to increase employment in small business will require a better
information base than is currently available. In the meantime, governments
could usefully investigate ways to assist business to reach its growth
potential and address some of the main barriers to employment identified in by
businesses seeking growth, including tools and programs that could assist small
business to better meet their staff recruitment and management needs. In
selected industries and regions other strategies that could be effective
include development of the regional infrastructure and capacity. Action to
address key costs to small business, including retail tenancy, may also be
useful.
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