From self-employed to employer
Hiring a first employee is an important milestone for entrepreneurs.
Text: Olve Wold
Whether and who to hire is one of the most critical decisions an entrepreneur must make. In practice, the first employee represents a doubling of the workforce, and of payroll expenses.
However, besides some anecdotal evidence we know relatively little about this crucial hiring event.
A recent study published in Small Business Economics, which is conducted among others of Bram Timmermans at NHH (see reference) used detailed labor market data from Denmark to investigate which self-employed individuals start to hire and how hiring decision affect the performance of these startups.
Few that hire
The study shows that only a small percentage of self-employed hire an employee. This provides additional support that only a minority of new businesses are responsible for job creation.
The likelihood of hiring the first employee is increased by age, education and wealth but decreases for those with poorer labor market signals; for example, those with a record of unemployment or otherwise have been outside the labor market prior to starting the business.
Previous studies have suggested that entrepreneurs tend to attract employees that are lower educated, have less job tenure, received lower wages and otherwise marginalized on the labor market compared to employees that enter into an employment relation with a more established firm.
The results support these findings to a large extend:
`The first employee is more likely to be unemployed or comes from outside the labor market, is lower educated, and earned a lower income prior to joining`, says Timmermans. He is Associate Professor at the Department of Strategy and Management, NHH.
The first employee is less likely to have recently completed an education, which might indicate that those that only recently completed an education initially prefer a career in established firms.
Hiring family is also rather common as 28 percent of self-employed hire a family member as their first employee.
‘My first employee: an empirical investigation’ is written by Bram Timmermans, Alex Coad (University of Sussex) and Kristian Nielsen (University of Aalborg).
‘Of course, entrepreneurs want to hire the best employees. But the best ones can find other jobs and will not risk working in a newly established business,’ says Timmermans.
In order to measure the effect of the first employment and whether employment growth drives sales growth or whether initial sales growth leads to hiring, they matched start-up businesses that resembled each other the most, based on characteristics such as gender, age, level of education and accounting figures from the years before the first employment.
Then they compared the development in sales in the businesses that hired and the ones that did not.
`We found that sales growth precedes hiring. Further, it does not matter who they are hiring. The decisive factor is whether they actually hires`, says Timmermans.
The study nonetheless gives grounds for optimism for anyone looking to start a business. Although it is more difficult to get hold of the most attractive employees, the researchers did not find a strong connection between the new employees’ characteristics and the development in sales the next few years.
A solution to unemployment?
Because entrepreneurs are willing to hire people others do not want, Timmermans believes that the study can have important implications for combating unemployment. It shows the potential for creating jobs for entrepreneurs.
‘If all self-employed entrepreneurs in Denmark hired one person, it would eradicate unemployment. But very few entrepreneurs take on employees. Why is that’, asks Timmermans.
He points out that many sole proprietorships have no plans to grow. However, he also believes that there are other reasons why entrepreneurs hesitate to make their first employment.
One of them is the cost. According to another study, small businesses must expect to pay 135 per cent of the total payroll expenses (Har du råd til en ansat? (‘Can you afford an employee’? – in Danish only), Sand & Paaske, Iværksætteren 2010). Timmermans believes that there are good reasons for politicians to consider the challenges facing entrepreneurs looking to expand.
‘I wouldn’t necessarily recommend more support schemes, but they should review the current support schemes with recruitment in mind,’ he says.
This is not the first research project Timmermans and his colleagues have conducted using data from the Danish employer register. Nor will it be the last.
‘We have already started working on a study about the how previous employment affects future hiring,’ says Timmermans.