EU admits that regulation stifles job-creation

Jun 15 2005 by Brian Amble Print This Article

The European Commission has admitted that Europe is missing out on the creation of 1.5 million new jobs because micro-businesses are being held back by excessive employment regulation and red tape.

A survey of 4,000 one-person enterprises (OPEs) across 19 EU member states by the Commission has found that more than one in 10 OPEs are put off taking on staff by red tape.

Around six out of 10 European businesses are OPEs that employ no personnel. These 15 million single self-employed entrepreneurs constitute more than eight per cent of total EU employment.

That this figure could be higher is clear from the fact that one in ten (11 per cent) of OPEs feel that the administrative burden that comes with employing staff - such as the reporting required under working time regulations or laws governing workers' protection against dismissal - mean they are disinclined to take on staff.

More than a third are not hiring staff because they cannot afford the non-wage labour costs - especially employer's social security contributions
More than a third Ė 36 per cent Ė are not hiring staff because they cannot afford the

non-wage labour costs - especially employer's social security contributions Ė which can more than double employment costs in some EU member states.

That almost six out of 10 OPEs cite these costs as the main disincentive to employment in France comes as little surprise. But three-quarters see costs as a disincentive in Poland, belying its reputation as a low-cost economy.

Ranking lowest here is the Netherlands with only one in ten managers of

one-person-enterprises considering this to be one of their main reasons for not

employing anybody else.

Across Europe as a whole, however, more than half of the enterprises surveyed said that administrative rules were inappropriate for micro-businesses and an obstacle to employment.

This was particularly true in countries with particularly onerous regulatory environments such as Germany, Poland, the Czech Republic, France and Austria, where between six and seven out of 10 OPEs said that regulations actively prevented them from recruiting staff.

In contrast, only a quarter (27 per cent) said that they had problems finding a suitable employee or found it too costly to train new personnel.

But are the Commission's figures may under-estimating the scale of the problem?

In the UK, - despite having Europe's most flexible labour market and low employment costs - research has found that a quarter of micro-businesses have purposely avoided growing their businesses to avoid the impact of regulation.

Almost all said that their decision was because of the impact of employment legislation.

The UK government itself has also acknowledged the issue. A survey by the department of Trade and Industry found that seven per cent of sole traders said they had not taken on staff because of employment regulations.

If this statistic is extrapolated across the 2.7m micro businesses in the UK that have no employees, it means that red tape has discouraged 200,000 businesses from creating jobs in one country alone.

In other EU member states, however, the bureaucratic burden dwarfs that of the UK. On average, European entrepreneurs spend three working days simply researching and fulfilling the necessary requirements for taking on staff, the report said, such as registering with public institutions and carrying out health checks.

Owners are also forced to put aside another 9 hours per month for the administrative procedures involved for just one employee.

The report's recipe for change is as simple as it is obvious. Reduce and simplify administrative procedures for recruitments; communicate administrative rules clearly and comprehensively and reduce non-wage labour costs.

In practice, this means adopting schemes such as one-stop-shops for all social security and tax matters, the greater use of online registration procedures and the simplification of forms and compulsory requirements.

But perhaps the EU as a whole needs to learn a lesson from one of its founders, Belgium. It submits all draft legislation that could have an impact on the administrative burden of citizens and enterprises to the 'Kafka test' - a reference to the novelist's depiction of bureaucratic nightmare.