01/04/2015

By Albert Bravo-Biosca, Senior Economist, Nesta


Building a more entrepreneurial economy is a widely shared policy goal. Most governments have developed a plethora of support schemes to help individuals set up new businesses. Many have also simplified their business registration regimes, making it possible to create a new company in less than 24 hours. And the digital revolution has provided both tools and opportunities for setting up new businesses. As a result, entrepreneurship is thriving.

But having lots of start-ups is not enough, unless they grow. In other words, quality matters more than quantity. Or to put it in Sherry Coutu’s words, we need more scale-ups rather than start-ups. Here the picture is much less rosy, with very substantial consequences for UK economic performance.

Some research that we published recently shows that UK GDP could have been £100 billion higher if it had been easier for the most productive firms to scale up. So what can we do? There is a long list of policies that would help. Some are at a very ‘macro’ level, such as creating a new European single market for entrepreneurs that makes it much easier for new start-ups to scale up throughout Europe. Others are at a more ‘micro’ level, such as experimenting with new business support schemes and making sure we learn what works and what doesn’t.

This is precisely what we are doing at the Innovation Growth Lab, the new global laboratory for innovation and growth policy that we recently launched in partnership with several governments around the world. But here I would like to focus on another policy lever that we should consider: reforming labour regulation to make it easier for growing start-ups to attract the talent they need to scale up and succeed.

This is not only good for start-ups, but also for the wider economy. Productivity grows when employees move from low productivity firms to high-productivity firms. This is one the most important drivers of productivity growth, and becomes even more important when the speed of change of economies accelerates (since it is more difficult for incumbents to sustain their competitive advantage in front of younger, smaller, more innovative and faster moving competitors).

Starting a company involves many challenges. Growing a company to hundreds (or more) employees is even more challenging. Many startups fail not because the idea is bad, but because the execution is poor (or simply not good enough). This is why building a strong team that knows how to scale up companies and has experience managing large operations is crucial.

Unfortunately, attracting the experienced professionals that they need can be very difficult for start-ups (in fact, surveys in the UK and Europe show that recruiting staff is, after the macro-economy, the most important obstacle for high-growth firms). Leaving a well-paid and secure corporate career to join a growing start-up with uncertain success is a risky move (even if also an attractive one). And the current labour regulatory regime makes it unnecessarily more risky, to the benefit of large corporations and detriment of start-ups. An example can illustrate why. Consider an experienced manager who has been working for ten years in the same company, with an apparently secure job and the entitlement to significant severance pay in case of redundancy. He is approached by a start-up to join their team and decides to take the risk. Unfortunately the start-up fails a few months later and he loses his job. If he had stayed with the large corporation he would most likely still have a job, and if not, he would have received a substantial redundancy payment. Having moved to the start-up, he is now unemployed and receives no redundancy payment (but still has a mortgage to pay).

Redundancy payment is just one example, but many other employment rights are also conditional on an employee’s tenure with a particular firm (either as statutory benefits or as a result of the social and contractual norms that these seed). Is there a good reason why employment protection legislation should penalise precisely the employees that are already taking the risk to change jobs? Fortunately, it is easy to solve. Rather than making employment rights grow with an employee’s tenure in a particular firm, make them dependent on the total time in employment (regardless of whether this was in one firm or in multiple firms).

In other words, make redundancy payment entitlements portable across companies when people switch jobs (note that this does not mean that the start-up would be responsible for paying the cost). This may sound like a radical proposal that is theoretically sound but impossible to apply in practice. While there is not enough space here to elaborate on the details, there are different ways to put it in practice. Countries such as Austria have already transitioned towards this model, and much can be learned from its experience.

A reform along these lines would benefit start-ups, but not only them. Workers would also benefit, making it easier for them to switch to better-paying jobs, and as a result also giving them a stronger bargaining position when negotiating salaries with their current employers. Established businesses could also benefit, if it helps them fill the skills gaps in their workforce. And the wider economy would ultimately benefit, not only because high-productivity firms would grow faster as a result, but because the flow of employees across companies brings with it a flow of ideas and practices that can also help firms to improve their productivity.

This is why it is worth doing, on its own or as part of a wider labour regulation reform that tackles other important aspects that are already discussed more regularly, such as moving towards the Danish flexi-security model and introducing a clear distinction between what employers have to pay (and to whom) in case of redundancy and what employees are entitled to receive (and from whom). We need to make it easier for new companies (particularly start-ups) to hire the employees they need to experiment with new business models and product offerings, but also make it easier to dismiss them if these don’t work out as hoped (while still offering a strong safety net for individuals who lose their job).

The next government will enjoy a country with full employment (or close to). This is when it is easier to implement major reforms to labour market regulation. Moreover, with full employment, the UK’s economic growth will ultimately depend on the UK’s ability to increase productivity growth, so now is the time to implement productivity enhancing reforms.


Albert Bravo-Biosca’s essay is published as part of The Recruitment and Employment Confederation’s book ‘Building the Best Jobs Market in the World: The Expert View’