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20 responses to “Quicklink: Start-ups and Safety Nets”

  1. Moz

    Wow, NZ stands out quite distinctly. I wonder if that’s partly because of ACC – instead of ridiculous amounts of public liability and OHS insurance everyone just pays a levy to what amounts to a “government insurance for everything”. So not only is that insurance cheaper, you’re much less likely to get sued so business risks are reduced. Of course, that model is under attack by various people, not least foreign insurance companies who either want to buy it or destroy it, or both.

    Is suspect what makes the US remarkable is the high cost, and hence the greater investment required to start a new business. One consequence is that there’s more money available for advertising and self-promotion, where in other countries 99% of business startups are based in a living room or garage. They don’t have time to do ego-boosting interviews for “Investor” magazine, or any real interest since they’re not looking for funding.

    The flip side is that getting investment here and in NZ is probably harder. I know a few geeky types who’ve gone to the US or China because they’ve found it impossible to get that couple of million they need to get out of the garage. But I also have friends who managed it, and at least one who’s now MD of a listed company.

  2. Mercurius

    Even plain old vanilla economic rationalism tells you it makes sense to have universally-underwritten healthcare. How much is it costing the US in lost productivity to have millions of demoralised workers in jobs they hate, just for fear of losing health insurance by changing workplaces?

    The precarious nature of the US health insurance means there is a huge mis-allocation of human resources across the economy. Lots of round pegs in square holes, for reasons that have nothing to do with the jobs or the companies involved. This is a huge impost on businesses — it’s no different to trying to set up a company in a country where the roads are crap, or the power grid is unreliable. Why aren’t more businesses lobbying the US government to universalise health care, so they don’t have to try and run their companies in the HR equivalent of a pot-holed, brownout-prone country?

  3. Jennifer

    But does NZ stand out because employment laws favour contractors rather than employees? I don’t know all that much about NZ employment law, but Australian micro businesses have increased quite a lot with the increase in white collar contractors.

  4. Shane in QLD

    Interesting statistics.

    I also investigated Health Insurance in the US and the cost involved in having it. Based on 40 hours per week at the minimum hourly wage in the US a family of 2 Adults and 2 Children will be only able to afford 1 thing each month and that is Private Health Insurance. There would be no surplus funds for Rent, Food, Clothes or anything.

    So even if you are on a higher wage you need to arrive at a certain income level where you can afford Foor, Rent, Clothes etc etc before you can even consider health insurance

    No wonder there are so many in the US without health insurance. They simply cannot afford the cost and therefore cannot afford the risk of leaving the job they have when there is 10% unemployment and jobs being sent offshore at an alarming rate

  5. Chris

    It would seem pretty obvious that lack of universal healthcare discourages people from taking risks and doing startups. However, like Jennifer I do wonder how many of those are authentic company startups (how many of these employ more than one person) or are perhaps tax shelters instead – is there also a correlation between the startup rate and the difference between the personal and corporate tax rate?

  6. Fine

    I notice these stats are form 2007. I wonder how different the figures might be for Iceland and Ireland now?

    But, it’s obvious when someone points it out, that feeling secure encourages people to take risks.

  7. Wozza

    Don’t want to spoil the America-bashing, but these data are almost certainly nothing more than an artefact of very different collection methods.

    The OECD itself did a report titled “International Comparability of business start up rates” in 2006, which concluded that there was virtually no comparability since countries used very different collection methods and definitions for business start ups. Problems include timing of collection (at what point in the process is a start up measured? How often is data collected?), different collection methods (survey, business register, census, etc), thresholds (how big before qualifying? What types of businesses are covered), issues with counting numbers of unregistered businesses and/or illegal migrants starting businesses, and so on.

    It even noted that there were two sets of raw stats on start-ups for the US, one of which showed twice as many as the other (and higher levels than almost all other countries).

    It seems unlikely that these problems had been magically resolved by 2007.

    Anyone who thinks that Wimberley’s figures are not just reliable comparators, but even enable identification of the health system as the the US problem, is kidding themselves. It looks to me like an extreme example of a common form of argument – start with a conclusion (the US health system is crap) and fit any set of data you find, however contorted the reasoning has to be, to it.

  8. David Irving (no relation)

    So, Wozza, you reckon the US health system is pretty good, then?

  9. Wozza

    DI(NR) if you want to argue that the US health system is crap, by all means do so. I was not defending it, or if it comes to that attacking it.

    As I thought was obvious, all I was doing was making the point that a bunch of dodgy stats on business start ups is quite clearly not that argument. Putting it up as such is just silly.

    No wonder it was picked up for a run here.

  10. John D

    There are lots of risks and costs associated with setting up a business. Some of them are associated with giving up a job and some associated with the business itself.
    In the US, the horrendous cost of health care and medical insurance must be disincentives to giving up a job to try and start a business. Other issues like complex regulations and the toxic and unpredictable legal system aren’t going to help either.
    Apart from risk factors, people might be more likely to tke the risk of setting up a business if the job they are in don’t pay enough to finance a comfortable life.

  11. Link

    Jennifer at #3 has a point which probably makes these statistics more likely.

    But does NZ stand out because employment laws favour contractors rather than employees?

    Who’d've thunk that the long white cloud is also the land of the long, white, entrepreneur.

  12. furious balancing

    The comments at Wembley’s blog reveal that Wozza’s point is valid though. The discussion there reveals that collecting data on limited liability companies ignores the fact that many people start out in business as the Australian equivalent of a sole trader because this is the simplest way to begin.

    I’ve had an interesting couple of years as a small business operator and recently decided I didn’t want to be an employer anymore. It’s taken a while to resolve that without causing grief for employees, but the main catalyst for it was predominantly the way Workcover is implemented.

    I employed people to meet a pretty overwhelming demand for labour in my sector, and I decided to establish a model that was basically a profit-sharing model, with a bit of a buffer. In the end, I decided that my employees, if they were committed to the field would be financially better off being self-employed contractors themselves. The benefit for me is simply more freedom, less paperwork, and much less anxiety.

    Workcover is charged as a percentages of wages+superannuation, so the announced changes to super were a bit unhelpful too. Recent Workcover changes also leave workers more vulnerable than they once were, they also removed incentives for employers who had good safety records. Kevin Foley, SA’s former treasurer, rates these reforms as one of his greatest achievements. Go figure.

    I work in nature conservation, but under Workcover I am classed in the forestry sector. My brokered public liability insurance has an exclusion that prevents me from removing trees over 5 metres – this reduced my insurance significantly, but Workcover allows no such flexibility. My levy was 4%..for some perspective that’s the same rate as iron ore mining, oddly copper ore mining is 2.5%. Hmmm.

    BTW: what the government save in terms of Workcovers unfunded liability they probably need to spend on increasing the amount of Safework officers doing spot audits on all these contractors.

    Okay that was a bit of a rant, and dangerously off topic, apologies, but short story is LOTS of people are operating businesses in this country under a model that is not represented in Wembley’s figures. In the US the most enterprising people in the US have no safety net at all, because they are invisible – that’s an even greater shame than their health system debacle if you ask me, but it highlights that the premise of this story, though it’s one I am quite sympathetic to, is not really credible.

  13. Mercurius

    It looks to me like an extreme example of a common form of argument – start with a conclusion (the US health system is crap) and fit any set of data you find, however contorted the reasoning has to be, to it.

    Yeah, well, Wozza @7 ran @9 ran his common form of argument – start with a conclusion (nobody on LP knows what they’re talking about) and just sort of impute anything you like onto what people are saying.

    Having lived in the USA, I can vouch for the fact that they have the best health system money — a lot of money, more money than most people have — can buy.

    From what I saw of the startup scene on the West and East Coasts, I don’t believe that the health insurance situation stifles start-up companies. They have plenty of those, and plenty of entrepreneurs.

    However, as I said at 2, I do believe that the cost of healthcare leads to a huge misallocaition of human resources when non-entrepreneurial employees stay in jobs for which they are not a good fit, because they can’t contemplate the risk of losing health insurance.

    And there’s no America-bashing here. Loved it, would love to go back.

    I hope I have typed this slowly enough for Wozza to follow along.

  14. sg

    People snarking about this (yes, I’m looking at you, Wozza!) should remember that Hayek refused to return to America to work until he was guaranteed state-sponsored healthcare, precisely because of the cost.

    He wasn’t willing to take any risks in America. Should we assume he was unusually timid?

  15. Ian Milliss

    So I gather from the comments that the argument against this is basically the usual multi-purpose denialist arguments – question the science, put up contradictory anecdotes, argue that it’s really measuring the wrong thing, argue that the US is a special case and different, etc, etc. Why is it so difficult to accept that the research probably proves exactly what it claims to prove, ie the rate of registration of new limited liability companies is not particularly high in the US. Wimberley’s musings could be debated but surely only ideologues could be upset by the obvious implication of the stats, that yet again US propaganda about itself is propaganda?

  16. Patrickb

    @9
    “No wonder it was picked up for a run here”
    I really don’t know why you bother. I assume you’re not paid to be a total contrarian and it doesn’t seem to give you much pleasure. Perhaps you think, in a Hendersonian mode, that you are providing a public service?
    Anyway, it seems to me that without knowing very much about the collection methods that the research shows that there may be a link between a poor social welfare system and a level of insecurity that prevents people from realising their potential. And you could also say that the terrible inequity in wealth in the US pretty much bears out the same thing, you stay where you are and keep still otherwise you get caught, chewed up and spat out.

  17. Chris

    Mercurius @13 said:

    From what I saw of the startup scene on the West and East Coasts, I don’t believe that the health insurance situation stifles start-up companies. They have plenty of those, and plenty of entrepreneurs.

    Is that just from the IT sector? If so I’d agree with you. Startup could be a bit misleading term here though given what they are actually looking at. Eg someone starting a company but not intending for it to grow significantly vs what I’d traditionally see as an IT startup where the idea is to grow big as fast as possible. I’d guess the age profiles are quite different too. People I’ve known getting into startups aren’t too worried about healthcare – they’re too focused on the lottery ticket they’re buying into :-)

  18. Katz

    The US system of enterprise-based medical insurance is undoubtedly a drag factor against certain folks from striking out alone. But the question is who? Mainly older employees with dependents face a serious issue in exposing themselves and families to a period of medical uncertainty.

    I doubt this concern is important for younger persons.

    The age profile of start-up principals in different jurisdictions would be interesting reading.

  19. furious balancing

    Exactly, my rather incoherent post was really just trying to say that what is being measured isn’t want comes to mind when most people think start-up.

    You can be an innovator in any field, but to suggest that simply starting a company makes you an innovator or an entrepreneur, as this study has done, isn’t credible or valid. Many people become incorporated in this country to meet a labour demand, in many cases it’s growth for the sake of growth, and innovation can often take a back seat. I was in a hurry earlier, apologies for making little sense, all I really should have said is that Wozza has a point that the study is gathering the wrong metrics. Forget the stuff about workcover, I was simply trying to point out that a one size fits all ‘safety net’ has it’s limitations.

  20. Chris

    furious balancing @ 19 – agreed – for the types of companies that I think of when I hear “start-up” I think lack of any income for an extended period of time is a much bigger disincentive than the lack of health insurance.