Why do micro-enterprises not employ more people?

In other words, they have fewer than ten employees when the number of people is converted into full-time jobs. Self-employed people account for slightly less than 70 per cent of companies. In other words, there are slightly less than 90 000 employer companies in Finland and it seems that the number is in a slight decline.

Over the past few years, the number of employer companies has stagnated. Since the turn of the millennium (2001–2020), slightly less than 160 000 new jobs have been created cumulatively in SMEs, while about 8 000 jobs have been cut in large enterprises (companies employing more than 250 people). More specifically, the number of jobs has decreased only in companies employing more than 1 000 people.

As a rule, new jobs have been created in companies employing between 10 and 100 people. It should be noted, of course, that as companies grow (or reduce in size), they move from one size category to another. However, it is noteworthy that only 13 500 new jobs have been created in micro-enterprises during the period in question. A closer examination into the group of micro-enterprises reveals that the number of entrepreneurs employing between one and four persons has particularly decreased. This development is very worrying in terms of business dynamics and the growth of the national economy.

What kind of country is good for entrepreneurial activities? Almost all social policy decisions and structural factors prevailing in society affect the conditions of entrepreneurship. Successful business operations require, for example, fair competition, open markets, top expertise, effective infrastructure, well-functioning financial markets, compliance with the rule of law, equal treatment, well-functioning labour markets, a reasonable level of taxation and a public sector focusing solely on its core tasks.

On average, Finland is a good country for entrepreneurial activities, as also indicated by many international studies and reports. Finland ranks among the top 15 countries in several reviews comparing entrepreneurial conditions (such as the Global Entrepreneurship Index). The same studies also indicate that, if there is room for improvement, it is in the functioning of the labour market.

In Finland, the labour market’s failure to function effectively is particularly reflected in small companies. There are too many obstacles to employment. This has led to an increase in activities resembling self-employment. It is easier and more risk-free for a company, particularly a micro-enterprise, to buy work and services from another company than to take the risk of employing someone. This development is a somewhat worrying phenomenon for the national economy.

The situation should not be interpreted in such a way that an increase in the amount of (sole) entrepreneurship is not desirable, quite the opposite. However, we must make sure companies can grow. Growing companies invest, innovate and are more likely to become international, and thus they create a lot of value to the Finnish economy. An increase in entrepreneurial activity that offers employment would also be desirable from the perspective of social policy. For example, many small entrepreneurs do not currently have their pension security at a sufficient level.

Why is the threshold for offering employment too high for micro-enterprises? Firstly, it is obvious that companies do not hire people in order to make them redundant. Micro-enterprises often do not have the (financial) possibility to use recruitment professionals when hiring their first or second employee. Recruitment is not always successful, for one reason or another. However, it is essential to move on from the situation. This is in the interest of the employee and the company. It is clear that a weaker dismissal protection would facilitate employment, especially by micro-enterprises. Impact assessments dealing with the weakening of dismissal protection show that less stringent regulation of small enterprises would be justified, as small enterprises are normally more sensitive to the cost of employment protection than larger companies. In other words, dismissal protection has a greater effect on the recruitment of small companies. It should be noted that a weaker protection against dismissals increases the number of recruitments and dismissals. This significantly improves the chances of the unemployed and those coming from outside the labour force to find employment.

Societal decision-making must realise that the rules of the world of work have an impact on whether people have any work at all, whether the results of our work can be sold to other parts of the world, and how our entire well-being can ultimately be funded. Each company and workplace is different and faces international competition one way or another. Therefore, employment regulation must become more flexible and enable different procedures and contracts. The rules of the world of work affect both the number of people in employment, working hours and the competitiveness of Finnish work.

Studies have shown that good relationships between employers and employees provide a solid basis for the development of the labour market so that the freedom of local bargaining in companies and workplaces increases. For this reason, the government needs to strike a new balance between the principle of employee protection and the functioning of the market in terms of the regulation of employment. Increasing opportunities for local bargaining does not, and must not, imply a deterioration in the security of employees, as employees covered by a collective agreement system must always have the right to rely on the applicable collective agreement. In addition, the bargaining must take place within the limits of the mandatory legislation laid down by the Parliament.

Micro-enterprises have a huge potential for offering employment. It is high time to allow society to realise this potential, as when micro-enterprises employ more, nobody is on the losing end.

Author: Mika Kuismanen, PhD, Vice President, Chief Economist, Federation of Finnish Enterprises