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Jobs and growth, but what jobs?

By Ken Wolff

There are two key aspects to the government’s ‘jobs and growth’ mantra: one that it has been successful in creating 300,000 jobs and that its cut to company tax for small businesses will encourage business expansion (growth) and create more. Both assertions, however, are a bit rubbery to say the least.

For the claim about 300,000 jobs, you have only to look at their ‘glossy brochure’ style budget overview. The graph on page three shows that about 200,000 of those jobs were created in ‘household services’ and about 150,000 in ‘business services’ but there was a loss of jobs in ‘agriculture, construction and mining’ and over 50,000 jobs lost in manufacturing. That loss of manufacturing jobs is for 2015 alone and takes no account of coming losses as Holden, Ford and Toyota close: so there are many more job losses to come.

‘Household services’ comprises the ABS defined industries of:

  • accommodation and food; education and training; health care and social assistance; arts and recreation; and ‘other services’

‘Business services’ comprises:

  • professional, scientific and technical; financial and insurance; administration and support; rental, hiring and real estate; and information, media and telecommunications.

I have listed those industries because ABS data from November 2015 shows that ‘household services’ includes most of the lower paying jobs. ‘Accommodation and food’ is the lowest paid of all industries at $1072 for average weekly full-time earnings; ‘other services’ is $1164; and although education and training averages $1591, the average weekly earnings across the five ‘household services’ industries is $1332.

‘Business services’ on the other hand includes more higher paying industries and across its five industries averages $1574 for weekly full-time earnings, over $200 more.

Are you getting the picture? — more than half of the jobs growth is occurring in the lower paid areas. And these figures are based on average full-time earnings, whereas these areas also include many part-time employees and casuals earning less. (Overall average weekly full-time earnings at the time was $1561 but average weekly earnings dropped to only only $1146 when part-time and casual workers were included.)

As at February this year household services employed in total 3.95 million people and business services 2.32 million. But employment growth appears to have slowed since August last year. For example, in trend terms, employment in the accommodation and food area fell 0.2% in August, 0.3% in November and another 0.3% in February. Even in areas that are continuing to grow, growth has slowed: health and social assistance grew 1.8% in August, 0.6% in November and only 0.1% in February. Across all five industries in that sector there has been an average downturn of 0.3% in employment between November 2015 and February 2016 (or about 12,000 jobs).

Business services has fared better but there is still evidence of employment growth slowing. Even financial and insurance services which had growth of 3% in August had slowed to 2.3% in February and professional, scientific and technical employment had slowed from 1.1% growth in August to only 0.1% in February.

So where will the jobs come from if employment growth is slowing? Will the government’s small business tax cuts really provide the boost it claims? — the nature of small businesses suggests not.

The ABS defines small businesses as having fewer than 20 employees, while the ATO defines them as having a turnover of less than $2 million. Medium sized businesses have 20 to 199 employees and large businesses, 200 plus.

In a 2012 report, there were 2.05 million small businesses, or 96% of all businesses in Australia: there were 81,000 medium size businesses and about 6,000 large businesses. (I noted that Bill Shorten was referring to small businesses as making up 93% of Australian businesses, which may be an updated figure.) Small businesses accounted for 47% of employment, medium businesses 23% and large businesses 30%. Despite their predominance, small businesses accounted for only 35% of production, medium businesses 22% and large businesses 42%. Although 42% of small businesses were engaged in exporting goods, they contributed only 0.5% of the value of exports.

Sixty-four percent of small businesses (1.31 million) had no employees and another 25% had from 1 to 4 employees, meaning 89% of small businesses employ four people or fewer.

The government may argue that its approach will see some small businesses become medium sized businesses and thus create considerably more employment but that does not fit previous history.

Around 300,000 new small businesses begin operations each year, representing around 15 per cent of the total number of small businesses, while a similar number cease to operate.

… The small businesses most likely to expand are those with between 1 and 4 employees, while few businesses without employees evolve to take on employees. These rates of expansion and contraction appear reasonably stable over time, with similar rates in 2007/08 and 2010/11 despite different economic conditions. [emphasis added]

So two-thirds of small businesses are unlikely to add jobs to the employment equation.

Small businesses do not fare as well as larger businesses. Surveys by groups like the ACCI and the banks regularly show that when business conditions are poor, they are worse for small business; and when business confidence is low, it is lower for small business. The report suggests that staffing of small businesses had fallen in the period leading up to 2012, although medium and large businesses had either increased or maintained staffing levels (but have fallen since). So the evidence is that small businesses are more susceptible to economic winds.

The major source of funding for small businesses is personal savings: personal credit cards are also used in about 20% of cases. One problem is that small businesses face about a 1.5% premium on bank business loans compared to bigger businesses because of higher ‘risk’ — they are seen by the banks as having more volatile revenue streams. That leads to small business owners using personal credit products rather than business products.

The RBA also reported that:

The strong links between small businesses and households also accords with the finding that while small businesses tend to have less debt than large businesses, households that own small businesses tend to have higher debt than other households …

So small business debt appears as personal debt, not company debt. A tax cut does not change that.

Small businesses are also meant to be encouraged by Turnbull’s innovation policy but:

In a random sample, funding by business angels and venture capital firms is close to non-existent. This is quite different from the picture of “typical” start-ups from the business press or business school textbooks. The similarity in the patterns for nascent and young firms also suggests that there is usually no radical change in the funding pattern from inception through early life. [emphasis added].

Finally, surprise, surprise — a bit like negative gearing being highest in Turnbull’s electorate — in NSW the two electorates (outside the City of Sydney) with the highest number of small businesses are North Sydney and Wentworth. Little wonder Turnbull is offering a tax cut to small business. Perhaps it is mostly about his own re-election rather than the re-election of the LNP government! Or, at the least, he is allowing his thinking on these issues to be overly influenced by the circumstances in his own electorate.

What do you think?

Is small business really the saviour for ‘jobs and growth’ that the government thinks it is?

Will a tax cut for small business encourage expansion or will such businesses use it to pay down their ‘personal’ debt?

This article was originally published on The Political Sword

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14 comments

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  1. Anomander

    Technically, a lot of these “small businesses” are in fact not businesses in the true sense of producing goods or services. They are higher income individuals who have incorporated themselves into a company structure to take advantage of the lower tax rates for business in addition to the depreciation and asset write-offs.

    Commonly, these people tend to be highly-paid contractors whose income would push them into the highest brackets, but restructing as a company minimises their tax and affords a range of benefits, for very little effort. This explains why so many “small businesses” are located in Sydney’s Eastern Suburbs or Lower North Shore – areas of high income.

    The ABS unemployment stats are a farce since they count only a few hours a week as being “employed” and therefore not counted amongst the ranks of the unemployed. The roy morgan survey is far more accurate in my opinion. http://www.roymorgan.com/findings/6739-roy-morgan-unemployment-estimate-march-2016-201604070750

    And as far as the average wage is concerned, the few ultra-high income earners distort the overall average making it appear much higher. A better way of calculating wages is to take a median. Matt Cowgill did an interesting article on this very issue back in 2013. https://mattcowgill.wordpress.com/2013/05/13/what-is-the-typical-australians-income-in-2013/

  2. Ken Wolff

    Anomander

    I agree with your point about small businesses. I’m not sure how they measure the number but I assume the ABN would be involved so that they also capture unincorporated businesses (which they do). But even that will have problems. I applied for a temporary ABN a few years ago when I had a three month contract. Even though it was a ‘temporary’ ABN, I recently received an e-mail from the ATO asking me to check my details and update them, or if I am no longer in business to notify them. So,.it appears I have been counted as a small business with no employees for the past few years. I imagine there would be a significant number of people with an ABN who do not conduct a business long term.

    I also know about the mean, median and mode and outliers and agree that the median is a better measure but I was not able to find median figures for each industry

  3. Elroy

    Come on what jobs? They’re are wonderful call centre jobs being created in Indian The Philippines and some other obscure countries. Ok! So these local people are not that well paid. And you can’t really communicate that well with them. And the fact that you have to call them several times because it’s so frustrating to get one solution to your problem because of the language barrier. And the fact they really have no authority to help you so you have to ring back and hope you get an Australian with the authority to help you. Ok it’s not that productive for you. So you waste hours of your time to get one small solution for mankind. I know this is progress and we should grateful that we are helping these foreigners to put food THEIR table. And I’m trying not be Negative because everyone tells me this is the Greatest country in the free world. I get depressed and angry about all this. “its globalism people glibly state”. You just have to think smarter they say. So I go away and think long and hard and laterally. By Joes I think I’ve got it. I’m going to go in to crime. That’s my solution. I can’t say what exactly what as you can understand. Though; I am very comforted by my new career choice. Thank you; Australia; for giving me my next big solution. Now I’m exited like old BIG Kev.

  4. gee

    you would have to be very brave, very stupid, or have a scary-smart idea to risk starting up a small business today, particularly with the prices you have to pay for commercial leases, in small business the land-lord is the greatest, most persistent and damaging parasite you will encounter.

  5. silkworm

    If the government is genuine about creting jobs, it should be creating government jobs, not giving money (tax cuts) to the private sector. The government should be investing in public programs such as the NBN, schools, TAFES, universities, the CSIRO, hospitals, the NDIS, etc., etc.

  6. Kaye Lee

    The greater the gap between the company tax rate and the highest individual tax rate, the more companies we will see registered.

    And as for commercial rents, I cannot understand why they charge GST on them. I pay it to the real estate agent who pays it to the landlord who fills in a BAS to forward it to the government while I fill in my BAS for the government to refund it to me. It is a ridiculous circle.

    And on that note, why can’t we make electricity GST free for domestic residences? It already is for businesses (sort of) as we can claim it back on our BAS.

  7. Anomander

    @Silkworm. Creating government jobs is anathema to this government’s policy and those dictated by their masters at the IPA, whose philosophy is for small, ineffectual government with no intrusion on the functioning of “the free market” to run everything, for a profit.

    This is exactly the reason why they are so keen to slash thousands of public service jobs, slash TAFE in favour of private education providers. privatise public services, and along the way decimate the number of union members, which further diminshes the support they provide to the ALP.

    It is a long-term strategy that is paying dividends with high unemployment, job insecurity, a casualised workforce on individual contracts who are so desperate for any job, they will accept wage stagnation or even an erosion of entitlements and conditions – leading to even greater profits for business.

    Of course the downside is that consumers need income to buy the goods and services, which is eroding the economy and leading to a revenue shorfall and increased government debt, which is why we’re in such trouble. And this is unlikely to change until we dump these ideologues and replace them with a more progressive government.

  8. Shaun Newman

    The LNP claim that they will create 200,000 jobs this year and that they created 300,000 last year, if that is so then they are falling short by 100,000 jobs this year, why? 40% of corporate Australia pays no tax and haven’t for years, it’s time for a Labor government to correct their 3 years of failure.

  9. Anomander

    Tont Abbott claimed before the last election that his government would create 1 million jobs.

    He neglected to add that none of them would be for Australians.

  10. Ken Wolff

    To those commenting on government jobs. The Liberals approach to government jobs (namely, small government) goes back to the Howard years when Peter Reith said if a good or service is in the Yellow Pages then there is no need for the government to provide it. Perhaps we could list a submarine or two in the Yellow Pages and see what happens!

  11. Florence nee Fedup

    Someone tell PM, his experience being reared by dad has little resemblance to what most single mothers endure. His father had money. He was sent off to boarding school, along with many of his peers. Spent holidays with both parents. Dad encourage him to respect his mother.

    Long way experience most single parent families. Mum expected/has to work to put food on table. Mom/dad has to take risks leaving kids by themselves. No expensive boarding schools to help.

    Lack money to provide most needs of kids.

    Often left DV relationship where the battle continues, despite leaving the home.

  12. townsvilleblog

    We are now in October and have learnt from Roy Morgan research that the number of unemployed Australians is 1,101,000 and a further 1,002,000 under employed Australians who are not getting enough hours to sustain themselves or their family, and the LNP have achieved further success in their quest in their hatred of workers and their representatives in their unions, we now have 13.3% or 3 million Australians living in poverty, well done LNP, your mismanagement has crippled this once great nation, as you continue to sell off government services to the 1% of the world’s rich who already own 50%+ of the global economy, but have insatiable greed enough is never enough, they must have more so the servants of the rich, the LNP are privatizing govt services to help the 1% gobble up another 10% to bring them to ownership of 60%+ of Earth’s economy, bloody pathetic!

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