Home > Uncategorized > Increasing self-employment is, alas, not the answer

Increasing self-employment is, alas, not the answer

One of the marked characteristics of the last 150 years of economic development is the rise of the large firm. In the days of Adam Smith, a company with 10 employees was already quite large. Toady, a company like Foxconn, which assembles your Iphone, has (about) 1,6 million employees, Walmart has 2,1 million and McDonalds has 1,9 million. Together, the last two companies have more employees than the USA army. A ‘Coasian’ view of this development is that, for some reason or another, large bureaucratic planning systems enable firms to profit from economics of scale (branding, outsizing unions, production) in increasingly global markets characterized by increasing commoditization. Consistent with the rise of these mega-companies, high numbers of ‘self-employed’ seem to characterize economies with relatively low levels of income.

In the European Union, increasing the number ‘self-employed’ is often seen as a method to make labour markets more flexible and economies more resilient and competitive. This won’t work. And it didn’t work – high numbers of self-employed did not shield countries from the crisis.

To the contrary. It might have exacerbated the problems: the paradox of flexibility.

According to the OECD,

In 2011, the share of self-employed workers in total employment ranged from under 8% in Luxembourg, Norway and the United States to well over 30% in Greece, Mexico and Turkey. In general, self-employment rates are highest in countries with low per capita income although Italy, with a self-employment rate of around 25%, is an exception. Ireland and Spain also combine high per capita incomes and high self-employment rates.

Over the period 2000-11, self-employment rates have fallen in most countries and by 1.6 percentage points in the OECD area. These falls have mostly occurred prior to the onset of the global financial crisis in late 2007. However the Czech Republic, the Netherlands, and the United Kingdom saw moderate increases and the Slovak Republic sharp increases, albeit from low levels. Conversely, and starting from a higher level, there have been sharp declines in self-employment rates in Chile, Greece, Italy, Korea, Poland, New Zealand, Mexico, Portugal and Spain.

Levels and changes in total self-employment rates conceal significant differences between men and women. In 2011, only Mexico, Switzerland and Turkey recorded self-employment rates for women higher than those rates for men. In the case of Turkey, almost half of all women with a paid job are self-employed, down from 78.4% recorded in 1990.

Don’t misunderstand me: there are quite some tasks which are performed much better and cheaper by self-employed people. In my country, it’s ten (10) times cheaper to let your self-employed family doctor stich a wound than when this is done in the emergency department of the hospital. Ten times. But family doctors do not learn to stitch, anymore, as they are basically trained to be hospital doctors.  It might be that the tide is turning and well paid self-employment is on the rise, leading to higher productivity, happier workers and satisfied customers. I don’t see it.

  1. June 8, 2014 at 12:19 pm

    Self employment may not be on the rise but it is held down artificially in places like the US quite easily with cash subsidies, favorable legislation and favors of noncompliance with Earth life support systems that are not allowed individuals. Gigantism is mostly a creature of State favoritism granted by graft.

  2. June 8, 2014 at 2:03 pm

    Maybe the reasons for this trend are evolving. In the industrial era the reasons would be mostly internal and material: Amortisation of capital, shock buffering, replacing market risk with trust among the members of the firm.

    Today the reasons are probably external and informational: Strong non-fragmented network effects, brand awareness and evaluation in the face of complexity, replacing market risk with trust in the firm’s relationship with customers.

    There are two smartphone ecosystems because external informational effects mean the market supports two, not because it’s too inefficient to produce a third. Just as Microsoft.

  3. June 8, 2014 at 7:30 pm

    Reblogged this on ..::popular spanish practices::.. and commented:
    less than a year ago,the definition of PYME (small & medium companies) in Spain was less than 50 employees…nowadays is less than 250 employees…you can imagine how many big corporations do we have in Spain: only a few of them, because most companies have 249 employees or less, with all financial benefits included in being PYME

  4. June 9, 2014 at 8:15 pm

    I think we could do a lot better job of helping micro companies turn into small and mid-sized firms or helping small companies turn into mid-sized firms. Many people start out doing bits and pieces of work. What they really need is helping learning to manage projects, clients and so on….or how to step out of their business and grow it. I think we’ll always have people who want to start businesses. And there’s been a lot of economic development funding given to people starting businesses. But getting bigger – that’s what we need to help them do, so that they can hire other people and we can grow the economy.

  5. June 10, 2014 at 3:14 am

    Economies of scale matter most when fixed costs are high relative to variable costs. In service industries such as consulting, fixed costs are relatively low and therefore size advantage is less critical. In those industries, big business often lobbies government for more regulation, increasing fixed costs and thus restoring its size advantage.

    It is well-known that small and medium enterprises (SME) are more innovative. Big business (e.g. Microsoft) often buy them up to destroy competition and continue to extract monopoly rent. Countries dominated by big corporations and big stock markets are becoming economically inefficient due to the dominance of rent seeking over innovation and production.

    Economic textbooks should teach students how to observe the real world in front of their very eyes, rather than damage their brains with different false, irrelevant or decrepit theories.

  6. June 10, 2014 at 3:07 pm

    There are quite rational arguments that economies of scale are not real.

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