The scourge of small business

The number of employees at businesses with fewer than four staff members totalled 10.1 million as of May, up 286,000 from the same period last year. The increase accounted for more than 60 percent of the 472,000 individuals who were newly hired over the last year, according to the statistics office. So as it turns out, small workplaces contribute considerably to easing the crippling economic slowdown.

But the effect isn’t as positive as one might think. Most of the newly hired were born between 1955 and 1963, not those in the younger generations who have many working years ahead. And according to the LG Economic Research Institute, the number of self-employed individuals totalled 5.85 million as of May, up 330,000 from a year earlier. Since their businesses hire fewer than five workers, self-employed people could distort the labor statistics.

It is also important to note that the businesses attracting those in their 50s and 60s are mostly in industries with low productivity and strong competition. Researchers say these businesses are part of the “Red Ocean,” a reference to a shark-infested ocean with limited prey. They add glut in the restaurant, retail and construction industries because they are easy to launch but make little money.

Together, fierce competition and sluggish domestic consumption could lead to mass bankruptcies and closures of these businesses. Since many of the small operations were opened with bank loans, their closures could have a significant impact on the financial sector. LG’s report warned explicitly that the rise in self-employment could pose a risk to the economy down the road.

We also need to be cautious about interpreting how the sharp rise in self-employment and small businesses impacts unemployment data. Any positive effect could be completely reversed should the economy take a turn for the worse. Authorities should watch the rising number of small workplaces with vigilance due to the potential risk they carry. At the same time, retirees should also be encouraged to seek jobs in line with their experience in place of opening mom-and-pop businesses.

To help, the government must lower barriers to entry in high value-added industries such as health care, tourism, education and legal and social services. Doing so would widen retirees’ choices when they think about opening new businesses.