Colin C Williams and Sara Nadin
Professor Colin Williams and Dr Sara Nadin of the University of Sheffield Management School have received funding from ISBE under the Research and Knowledge Exchange (RAKE) scheme to investigate what can be done about the ‘cash-in-hand economy’. They describe this growing problem and their research to tackle this sizeable and expanding realm.
Justin is precisely the type of entrepreneur that any government would want to help succeed. Having left school at 16 years old to set up his own car valet business, he is now three years on, and after much hard work, by all accounts a successful entrepreneur. He employs three people and has a rapidly growing portfolio of clients that includes not just domestic customers but a wide range of commercial contracts with garages and used car dealers. Justin, however, is unlikely to be heralded by any government as a ‘super hero’ entrepreneur. This is because, like many others starting-up successful enterprises, he conducts a large proportion of his business on an off-the-books basis. Although he wants a ‘legit’ business, he is at present torn between declaring his earnings, not least so that he can get a loan to further expand his business, and continuing to work on a cash-in-hand basis. Justin is not alone in this regard.
Size of the hidden enterprise culture
A survey of business opinion on the extent and impacts of off-the-books work identified that this constitutes a large segment of the UK economy. The 2004/05 Annual Small Business Survey of the Small Business Council (SBC) asked businesses to estimate the proportion of trade in their sector conducted on an off-the-books basis along with whether they felt that it was having a negative impact on their business. The findings provide a unique insight into the extent of the cash-in-hand economy in the UK and its impacts on businesses.
Based on telephone interviews with 7,505 small businesses, the finding was that one in seven (14 per cent) are negatively affected by off-the-books traders and nearly one in 15 (6.5 per cent) view such cash-in-hand work as having a significant or very significant negative effect on their business. Indeed, when asked about the amount of off-the-books work taking place in their sector, one in six businesses (16 per cent) said that 10 per cent or more of trade in their sector is conducted on a cash-in-hand basis and across all businesses, the mean level of trade conducted off-the-books was reported to be 8 per cent.
There were of course significant differences across sectors and regions, as well as different types of business. Large proportions of trade in some sectors such as the construction industry, motor vehicle trade, hotels and restaurants sector, retailing and land transport sectors (which includes taxi operators and furniture removals) were claimed to be conducted on a cash-in-hand basis. There were also significant regional variations in the degree to which off-the-books was seen to be prevalent, with business in peripheral rural regions (e.g., East Wales, the Highlands and Islands) amongst those claiming to be most affected. And new business start-ups were more likely to be affected by off-the-books work than more established businesses. Neither is this phenomenon confined to the UK. A recent OECD report reveals that out of a global working population of some 3 billion, around two-thirds (1.8 billion) work in the informal sector. This, therefore, is not some minority practice. It is a widespread phenomenon.
How can this hidden enterprise culture be tackled?
The size of this hidden enterprise culture and its negative impacts on businesses has not gone unnoticed. For many years, governments throughout the world simply sought to eradicate such enterprise by wielding large ‘sticks’ (such as by increasing punishments for those caught and improving detection measures). There has been a growing recognition, however, that if governments continue to pursue the eradication of these informal enterprises, then they will stamp out precisely the entrepreneurship and enterprise culture which they are otherwise seeking to nurture. As such, governments have recognised that they do not actually wish to eradicate such enterprise. Rather, they are now seeking to harness this hidden enterprise culture by helping them make the transition to becoming legitimate businesses.
This desire to legitimise ‘cash-in-hand’ businesses is the starting point of an ISBE-funded project under its Research and Knowledge Exchange (RAKE) scheme. Conducted by academics at the University of Sheffield in collaboration with colleagues at Community Links, a third sector community development agency based in London, the key aims of this project are to investigate the barriers that enterprises witness when they seek to make the transition from the informal to the formal economy and following this, to explore through knowledge exchange seminars how these barriers might be tackled by public policy so as to smooth transition from informality to formality for enterprises.
To understand the barriers that hinder enterprises from legitimising their endeavour, desk-based research will be undertaken to synthesise the findings of previous studies conducted across the world, followed by the collection of qualitative primary data through face-to-face interviews with 20 entrepreneurs in London operating partially or wholly off-the-books. Having established a fuller understanding of the barriers to formalisation, two knowledge exchange seminars will be then held to explore how these barriers might be tackled so as to encourage and support the formalisation of enterprises. One will be UK-centred comprising senior government officials, social partners (trade union and employer federation representatives) and academics interested in tackling this phenomenon. The second knowledge exchange event will have an EU-wide focus, be hosted by Community Links in London, and will involve European national government officials (from tax agencies, labour inspectorates and social security departments), European Commission representatives from DG Employment, trade union, employer federation and ‘think tank’ representatives and academics.
The outcome will be a better understanding of the barriers that prevent informal enterprises from legitimising and the policy options that public policy can pursue to smooth this transition. Any reader interested in attending these knowledge exchange events, or hearing about the outputs of this project, are invited to contact Dr Sara Nadin S.J.Nadin@sheffield.ac.uk
Colin C Williams, Professor of Public Policy and Sara Nadin, Lecturer in Organisational Behaviour, Centre for Regional Economic and Enterprise Development (CREED), Management School, University of Sheffield