There seems to be a buzz. A buzz that Scotland has become more entrepreneurial. We have the exciting new website published by my good friend Bill Jamieson, Scot-Buzz. On Friday, in the Scotsman, the imaginative nationalist columnist George Kerevan, in a very partial use of statistics to defend both Scottish government policy and the robustness of the Scottish labour market, asserted
In the year to March 2012, the number of enterprises in Scotland increased by a record 10 per cent – fully 30,835 new firms. Not only was this the biggest annual increase since 2000, the growth in new enterprises in Scotland happened at roughly double the rate for the UK as a whole. .... this is hardly indicative that Scotland was under-performing compared to the UK as a whole.
And George Kerevan is correct. The data he uses come from the latest Businesses in Scotland publication which was published on 7 November.
Unfortunately, I do not believe that these data are sufficient to draw the conclusion that we have a new entrepreneurial buzz in Scotland, or that the Scottish economy and labour market is doing very well thank you.
First, we need to say a few words about the data. The businesses that comprise the database are registered and unregistered businesses. The registered businesses are those that are registered for VAT and/or PAYE. The unregistered businesses relate, in the words of the relevant Scottish government web page
a substantial number of very small enterprises which have no employees and operate below the VAT threshold, and are therefore not included on the IDBR (which contains the registered businesses). A modelling procedure that combines data from the IDBR with data from the Annual Population Survey (annual version of the Labour Force Survey (LFS)), Family Resources Survey (FRS) and HMRC Self Assessment tax returns are used to estimate the number of unregistered enterprises.
So, this is not a simple count. There is a lot of estimation and to be blunt: educated guesswork in the series, which nevertheless does have the National Statistic kite mark.
This is how the data look when we separate out the registered and unregistered businesses
Yes, it is the unregistered businesses that are growing. The registered business numbers have been fairly stable over the first decade of 2000s. And the recent jump between 2011 and 2012 is in part to do with HMRC discovering more firms - see here page 2. The statisticians have tried to adjust the earlier numbers to be comparable but there must clearly be a health warning as to whether we are really making a like-for-like comparison with the earlier years of registered businesses.
Now, it is clearly the growth of the unregistered businesses that is interesting. These are the ones with no employees and which are sufficiently small to have a turnover less than the VAT threshold - currently £77,000 per annum - and are not registered for PAYE. Most of them will not have business bank accounts either - see below.
Over the period 2000 to 2012 their numbers have grown by more than 90,000 or 99 per cent. The number basically doubled. But there was something of an acceleration after 2006 with nearly 60,000, or two-thirds, of the rise occurring during the years of recession and limited economic recovery. An even rate of growth would have delivered about 45,000.
While there is now a large body of theory and evidence linking increased entrepreneurship to growth - see here and here - one would also expect a growing economy to raise business opportunities and hence stimulate entrepreneurship - see here.
But what we appear to see in Scotland is an apparent rise in entrepreneurship that has had no effect on growth to date. And this has occurred when the economy has been contracting and stagnating.
A reasonable person might conclude that these data do not indicate that there has been an increase in entrepreneurship of any sizable magnitude in Scotland.
This conclusion is supported by the Scottish clearing bank data on the opening of business bank accounts, which is taken as a one proxy for entrepreneurship. The latest data are shown in this chart
No suggestion of an entrepreneurial resurgence in these data.
So what has been happening?
The answer I think lies in the weakness of the Scottish economy coupled to structural and demographic changes in the labour market favouring part-time, multiple job holding and self employment as this post shows. And also a growing awareness that tax bills can be legally reduced by creating companies and paying corporation tax instead of income tax. But while the creators of the companies may have several different income streams from individuals' portfolio work, they have no employees and can't in truth be considered to be 'proper' businesses.
The chart below shows what has been happening to full-time employment in Scotland.
It has been falling since 2007 and is over 7 percent below its 2007-2008 peak compared around 3 per cent for total employment. Many of these full-time workers that lost their jobs will have gone into self-employment and there is a significant evidence base from across the world to support this "recession-push" hypothesis - of being pushed into self-employment but not necessarily entrepreneurship - for example see here, and here.
The latter study, by Dawson, Henley and Latreille (2009), which analysed the UK labour force survey between 1999 and 2001, did not find much support for the 'push' hypothesis but drew this interesting conclusion
Whether this conclusion would be as robust during the current period of severe economic downturn and rapidly rising unemployment is open to debate and, with suitable data, further future analysis. Indeed it would give cause for considerable concern if the proportion choosing self-employment because it represents the only alternative to economic inactivity was to rise significantly in the next few years. Such 'forced' choices may not lay solid foundations for well-resourced, successful new business ventures.
Indeed. And that appears to be what we are witnessing in Scotland.
Needs must, not entrepreneurial buzz.
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