European Employment Observatory EEO Review: Self-employment, 2010 Slovakia Lubos Vagac Centre for Economic Development July 2010 This article is the sole responsibility of the author(s)
1. Introduction Small entrepreneurship has a vital position in the Slovak economy, contributing substantially to overall production and employment (34 % and 31 %, respectively, according to data from 2008). Small businesses are represented by individual ( physical person ) entrepreneurs and legal entities. The majority of entrepreneurs operate as self-employed persons and among these the dominant group is tradesmen (operating based on a trade license) with a share of almost 95 % of the total number of entrepreneurs. Self-employment as a status of labour market utilisation emerged after 1990 with the expansion of private entrepreneurship. While in 2000 the self-employment rate was still fairly low at 8 % (the lowest amongst current EU27 economies), the last decade has seen an extraordinary increase of self-employment, in absolute and relative terms. The number of selfemployed doubled during 2000-2009 and so did the self-employment rate (15.7 % in 2009). There are several factors behind the increase, which are discussed in this article. The economic crisis has contributed to a further growth of self-employment, highlighting its superior incentives compared to salaried employment, referring mainly to the tax and social contributions systems. The importance of self-employment as an exit strategy from unemployment has grown during the crisis, as suggested by an increased number of applications for start-up support. Table 1 Self-employment trends (long-term and short-term) 2000 2006 2007 2008 2009 1Q09 2Q09 3Q09 4Q09 1Q10 Employees 1 931.0 2 002.6 2 043.6 2 094.2 1 994.7 2 024.4 2 003.4 1 988.2 1 962.8 1 906.9 (000's) Selfemployed 167.4 289.2 303.6 335.2 370.8 363.8 374.7 378.5 366.3 371.5 (000's) Selfemployment 8.0 12.6 12.9 13.8 15.7 15.2 15.8 16.0 15.7 16.3 rate (%) Selfemployment 2.5 3.1 3.1 3.2 3.4 3.5 3.4 3.4 3.4 3.5 rate, having own workers (%) Source: Statistical Office of the SR, own calculations Somewhat in contrast to the statistics are attitudes in society towards self-employment and entrepreneurship in general. Available surveys show a high preference in the population for employee status: almost two thirds of Slovaks prefer working as an employee and only 26 % declare an interest in being an entrepreneur. 1 There is a prevailing negative attitude in the public towards entrepreneurs, who are often regarded as dishonest, calculating and/or making profit at the expense of common people. 2 Citizens acknowledge positive contributions which entrepreneurs bring to job creation and economic development and value their diligence and skilfulness. The ambivalence in public perception is well demonstrated by the fact that in spite of the generally unfavourable image more than half of respondents wish their children become entrepreneurs. 3 1 Flash Eurobarometer 283. 2 TNS SK and TREND magazine (2009); Flash Eurobarometer 283 3 TNS SK and TREND magazine (2009) 2
Unfortunately, the increase in negative perceptions in the last four years 4 has much to do with the attitudes of public authorities towards the business community. A confrontational policy approach adopted by the government 5 towards various (successful) private sector groups has certainly not added to an atmosphere of trust in society towards entrepreneurs. 2. Assessment of national Labour Market policies and recovery measures The high increase in self-employment in the past decade was driven by a number of factors. These included structural processes and reforms such as the privatisation of state-owned enterprises and comprehensive reforms of taxes, pensions, labour market and social policies, etc. All this has contributed to an improved business environment and new jobs in the private sector. Although reforms proved to be conducive to overall employment growth, it may be assumed that they provided more important stimuli to self-employment than paid employment. The following is an assessment of the most important policies implemented in support of business creation and self-employment in the framework of long-term (structural) reforms and the short-term (recovery) agenda. Long-term (structural) policies a. Tax and social security One of the main motivations to become self-employed in Slovakia is the expectation of higher income. 6 In fact, this ambition can be satisfied in many cases by a simple change to selfemployment status (e.g., when being an employee). The current setting of the tax and social security system namely favours the self-employed compared to salaried employees. Calculations show that in a situation of equal labour costs and expected retirement pensions, the net income of a sole trader is 39 % higher than that of an employee. 7 The self-employed pay contributions from a lower assessment base (half of income attained in the previous year). They can also lower their tax base by lump sum expenses at 40 % (and/or in some cases 60 %) of income. The tax and contributions scheme allows various speculative base adjustments, by which entrepreneurs can decrease their tax and non-wage burden. 8 Although this is by no means a business-promoting policy, it acts as a key motive in the decision to start a business. A higher burden on paid employment has resulted in a shift of workers to self-employment even in jobs and occupations normally performed by salaried employees (e.g., shop salesperson, nurse, etc.). A tightening of employee protection since 2007, which increases the costs of employment, has also contributed to this 'crowding-out' effect. b. Active labour market policy Business start-up support for the unemployed has existed in various forms since the late 1990s but a real breakthrough came with the new Employment Services Act in 2004. The law introduced a financial contribution for job seekers to start and operate a self-employment job and a parallel contribution for disabled persons. These policies are not particularly innovative 4 Based on comparison of Eurobarometer 283 (2009) and 192 (2007) results. 5 PM Fico government (2006-2010) 6 Flash Eurobarometer 283 7 Business Alliance of Slovakia (2008) 8 In 2008, the number of self-employed was five times lower than the number of employees (Statistical Office of the SR), but the self-employed paid eight times less on income tax (Ministry of Finance) and even 17 times less on social security contributions than employees (Social Insurance Agency). 3
but as experience shows, financial support is a crucial incentive for job seekers to set up a small business. The contribution to self-employment is a financial benefit that may be granted to an applying job seeker who has been registered with the labour office for at least three months, providing that he/she will commence and continue performing self-employment activities for at least two years. Applicants are obliged to complete special entrepreneurial training, develop a business plan and (since 2009) defend this plan in front of a commission. The contribution is intended to cover expenses linked to the chosen self-employment activity (e.g. to purchase work equipment or tools, not salary) and may be granted up to 45 % 9 of the sum corresponding to 16 times the total monthly labour cost, i.e. the average wage in the economy plus social and health insurance contributions. The sum is regionally differentiated, with applicants from less developed regions receiving higher support (the indicator being the district unemployment rate). The policy proved to be particularly successful in attracting vulnerable groups, mainly the long-term unemployed, and is considered by government officials the most efficient PES tool for new job creation. The two contributions have supported the creation of 65 000 jobs since 2004, which is more than half of all self-employment jobs started in the given time. Postprogramme employment 10 is one of the highest in the PES scheme and reached approximately 50 % in the given period. Although the risk of subsidising jobs that would be created even without public support is presumably low, there are indications that there are a certain number of beneficiaries, who register with labour offices just to get entitled to the contribution. The above mentioned tightening (examination of skills acquired in the training and assessment of the business plan by a commission, supplemented by an extended period after which a person can re-apply) was introduced to minimise speculative behaviour and misuse. 11 Table 2 Start-up support for job seekers 2004 2005 2006 2007 2008 2009 Jobs created with the 5 618 9 908 10 477 10 038 12 096 12 870 contribution to SE (1) Jobs created with the 108 271 405 389 337 439 contribution to SE of disabled persons (2) Spending on 1+2 as % of 17.8 26.0 29.1 29.8 29.1 26.3 total ALMP expenditures Source: Central Labour Office, Ministry of Labour, Social Affairs and Family of the SR, own calculations Start-up support has been allocated a significant portion of overall funding for active labour market policies (see table 2), with a substantial co-financing from the European Social Fund (ESF) (85 %). c. Reduction of the administrative burden Most of the reforms which made it easier to do business were implemented in the reform years between 2003 and 2005. The last four years have not brought significant progress, which is documented by worsening ratings of the business climate published periodically by think tanks and international agencies. 12 One of the most useful business-promoting measures 9 Up to 72 % of 24 times the total monthly labour cost for a disabled person. 10 Percentage of supported persons, who continue their self-employment job after 12 months, since completion of supported period. 11 Stricter regulations also apply to the contribution for self-employment of disabled persons. 12 For example, the Business Environment Index by the Business Alliance of Slovakia, Doing Business Index by 4
of last years is the introduction of one stop shops in 2007. 13 The main objective of this policy is to simplify access to the market for entrepreneurs by integrating all necessary administration related to business start-up and operation into one place in a time- and costefficient manner. The implementation was planned in two phases. The first phase was launched in October 2007 and made one stop shops accessible for entrepreneurs who carry out business based on trade licences. The second phase started 17 months later than planned on 1 June 2010 and opened one stop shops for entrepreneurs who perform activities based on other permissions and registries. Apart from administering the registration in the trade and/or commercial register and issuing a trade license, one-stop shops enable persons at business start-up to complete income tax registration, registration for the purpose of compulsory health insurance, and provide for an electronic copy of a defaulter sheet 14. Social security registration is not included in the service so far due to technical issues. Changes effective since 1 June 2010 simplify and speed up the registration process at trade licensing offices. Data from 2009 imply that a vast majority of the new self-employed made use of one stop shops when registering a trade. Associations and chambers of tradesmen and small enterprises evaluate the policy as highly conducive to entrepreneurship and the reduction of the administrative burden. A commission of independent experts awarded the first phase of the policy the second highest ranking among key economic and social measures approved or implemented in the first half of 2007. 15 Another important measure reducing the administrative burden of doing business was the launching of electronic communication with the commercial register (registration, statements, changes, de-registration, 50 % lower fees for electronic communication rather than paper, etc.). It is mainly legal entities which benefit from this policy but also physical persons/selfemployed conducting business based on the commercial code. d. Other policies Entrepreneurs and micro enterprises may benefit from a range of other policies, including: a microcredit programme administered by the National Agency for Development of SMEs, providing credits at preferential conditions; a network of 16 entrepreneurial and technological incubators supporting new start-ups; entrepreneurial education and training, organised by public and private training facilities for the unemployed, employees, students and schools leavers, including subsidised programmes (de minimis scheme). Short-term (recovery) policies The policy response of the Slovak government to the crisis comprised three recovery packages and a number of other specific measures to revitalise employment, entrepreneurship and domestic demand, with a total budgetary impact of 1 % of GDP. A special employment recovery package was adopted in February 2009 and included two new temporary measures the World Bank, Global Competitiveness Index by the World Economic Forum, etc. 13 The implementation of the policy was driven by the transposition of Directive 2006/123/EC of the European Parliament and of the Council of 12 December 2006 on services in the internal market. 14 An extract from the criminal register (register of sentences) 15 http://www.ineko.sk/heso/projekt-heso-1-a-2-stvrtrok-2007 5
specifically designed to support self-employment a financial contribution in support of selfemployment and a similar measure to support self-employment activities in the agricultural sector. The measures target unemployed persons and persons in material need who may apply for a financial contribution to cover non-wage labour costs if they commence and perform a self-employment job for at least two years. In the 15 months in effect, the new tools have failed to attract any interest of jobseekers (three and no applications, respectively). The presumable reason is an overlap with the existing self-employment support; since the policies cannot be combined, jobseekers reasonably choose the more rewarding existing contribution (there was a 7 % increase in applications in 2009, which continued also in the first five months of 2010). Entrepreneurs were more in favour of the recovery measures which simplify and reduce administration related to business operation. These include a shortened period for VAT reclaim (from 60 to 30 days), simplified fuel records (introduction of lump-sum expenditures in the sum of 80 % of fuel costs), simplified tax records and bookkeeping for entrepreneurs with an annual turnover below EUR 170 000 (single-entry bookkeeping may be replaced by keeping simple records of costs, income, assets and liabilities), and a temporary lowering of social security costs (by 2.75 percentage points decreased contributions to the reserve solidarity fund). Recovery plans included also increased funds for the microcredit programme and more support for education and training of entrepreneurs but these objectives have been achieved only partially due to prolonged administrative procedures. A coherent assessment of the measures is not available, yet it may be stated that they are helping to mitigate the negative effects of the crisis. 3. Quality of self-employment jobs Although there is not an established approach to assessing the quality of self-employment (unlike dependent employment, for example), some observations can be made with respect to the qualitative aspects of self-employment in Slovakia. When asked about the pros and cons of being self-employed (vs. being an employee), Slovak entrepreneurs usually name along with the typical freedoms of working time and workplace the prospects of higher income as the main advantage. Thereby they refer to the opportunities offered by the tax and social security systems to adjust the tax base, defer registration and payment for the purpose of social security, and/or pay lower tax and non-wage labour costs in general. Paradoxically, the advantages entail also risks which can be found mainly in the lower social protection of self-employed: no paid leave, no mandatory unemployment insurance and hence no benefits when unemployed, the risk of low future pensions (as most of the self-employed minimise their base for social contributions), the obligation to pay contributions even when in loss (as these are calculated from last year's income), but usually also longer working hours and/or less time for family and leisure activities. 16 In addition, the advantages of independence and freedom to choose time and place of work lose real meaning in the case of self-employment jobs that substitute salaried work. The self-employed are often in an ambiguous position. They are commonly equated with 16 Flash Eurobarometer 192, 283; author's discussion with self-employed colleagues. 6
entrepreneurs yet many of them resemble much more employees as they carry out work typical for salaried employment: they work for one employer, do not employ their own workers, have no real expenses, and use equipment provided by the employer. The selfemployment status is thus only a cover-up for efforts to reduce taxes and contributions paid by the company and the worker. The downside of the arrangement is that the self-employed worker does not dispose of the legal protection available to employees. Although there have been legislative attempts to specify the distinction between dependent work and selfemployment (notably the 2007 revision of the Labour Code), these have apparently failed to reduce transitions. An indirect evidence is the particular increase in jobs in the category of self-employed without own employees in recent years. Instead of trying to define which jobs can be performed by the self-employed and which not, policy attention should be paid to the core of the problem the inevitable harmonisation of tax and social security regimes for employees and the self-employed. This may eventually decrease the attractiveness of becoming a self-employed person but should clean up the market of speculative "entrepreneurship". It would also open the floor for a discussion of how labour and social protection of the self-employed can be reasonably improved, while preserving the typical advantages of the status. As far as sustainability of self-employment jobs is concerned, two categories of factors may be considered internal (skills and qualifications of the self-employed, their plans, etc.) and external (impact of the broader business environment). While statistics capture the gradual increase in self-employment jobs, there is not much information available about how long these jobs last. Some implications can be derived from hard data and surveys about the profile of self-employed and their business plans: Almost half of the self-employed (49 %) have full secondary education (ISCED 3-3A) and one quarter (26 %) have tertiary education (ISCED 5+, Source: NADSME survey, 2006). The relatively high educational attainment gives reason to believe that the majority of the self-employed have a solid position on the labour market. Roughly every fourth person receiving start-up support from the public employment services scheme is a long-term unemployed job seeker (Source: Central Labour Office, 2010). Although equipped with a business plan, special training and start-up capital, there is an implicit assumption that jobs run by persons long absent from the labour market may face a higher risk of early closure. Most of the self-employed are in the age category 30-39 (28.6 %), but 27 % are aged 50 and over (of which 25.7 % are aged 50-69, Source: Statistical Office of the SR, 2008). The figures imply that a quarter of current self-employed may close their business in 10 years. There are also implications for the pension system. Almost 80 % of self-employed tradesmen do not envisage a change in their form of entrepreneurship, and only 3 % think about shutting down the business and getting a paid job. The remaining respondents contemplate setting up a different form of enterprise (e.g. limited liability company, association of tradesmen) and/or keeping the self-employment job and getting a secondary paid job (Source: NADSME survey, 2006). Overall, available data imply that the average active self-employed person in Slovakia is predisposed to continue his/her job for a longer period of time. This is suggested also by 7
international surveys (e.g. Eurobarometer 283), which point to a low preference of Slovaks for self-employment but also to certain stability when already active in this status. Surveys on barriers to entrepreneurship show that small entrepreneurs struggle with (almost) the same set of problems as larger enterprises. Among the main barriers are unstable and nontransparent legislation, a high administrative burden (e.g. fees, annual health insurance clearance, compulsory visits with public institutions, etc.), paradoxically also high social contributions and complicated administration of social security. An important problem is law enforcement and generally a poorly functioning judiciary system. 17 Yet it is acknowledged that small entrepreneurs are more vulnerable in certain situations due to capacity issues, notably in access to credits, to funding from structural funds, access to public tenders, their position in lawsuits and in financial transactions, in monitoring of legislative changes, in access to continuing education and training, to R&D and innovation support schemes, etc. Some of these disadvantages have aggravated in the times of crisis. Access to credit has worsened globally but small entrepreneurs were most affected by restrictive measures taken by credit institutions. The vulnerability of entrepreneurs in commercial transactions has increased as many self-employed report extremely delayed payments from purchasers and face insolvency. 4. Conclusions There has been a large growth of self-employment in Slovakia in the past ten years. The selfemployment rate doubled to almost 16 % in 2009 as a result of policies supporting and easing business creation and a preferential tax and social security regime for the self-employed. Starting a self-employment job with public support has become an attractive and also effective exit strategy for many unemployed. The economic crisis has induced a further growth of self-employment jobs. Several policies have proven useful. Active labour market policy has introduced financial support for the unemployed to start their own business. More than half of self-employment jobs created since 2004 have been supported by start-up incentives. One-stop-shops have eased business start-ups and contributed to reduced administrative burdens. The government's response to the crisis included an employment recovery package with new temporary tools in support of self-employment; however, these have failed to attract interest. A set of business-promoting policies has helped to reduce administrative costs and simplified the operation of small businesses affected by the downturn. There is no conventional system of assessing the quality of self-employment. Preference for self-employment status, although low in international comparison, has been prompted also by a lower burden of taxes and social contributions compared with paid employment. This led to an increase of disguised dependent jobs performed by the self-employed, who find that they are not covered by employment protection. Available data point to a relative stability of selfemployment jobs. Small businesses are concerned mostly about unstable legislation, high administrative burdens, and the complexity of the social security system. To enhance the quality and sustainability of self-employment jobs, a number of measures should be taken into consideration, most importantly the harmonisation of tax and social 17 See, for example NADSME 2009. 8
security regimes for the self-employed and employees, stabilisation of business legislation and a further reduction of administrative and financial burdens. Increased attention should be paid also to improved law enforcement and faster and fair resolution of disputes, entrepreneurial education, and the involvement of small businesses in future skill needs identification. The educational component in start-up support for the unemployed could be also reinforced. 5. Bibliography Business Alliance of Slovakia: A comparison of the economic profitability of work performed by an employee, sole trader and single-person limited liability company. Bratislava, 2008 http://www.alianciapas.sk/menu_pravidelne_nazory_29072008_analyza_full.pdf European Employment Observatory: Workshop on Self-Employment. European Commission, Brussels, 16 June 2010, workshop report drafted by GHK Consulting Ltd http://www.euemployment-observatory.net/resources/meetings/eeoworkshopreport-self-employment.pdf Flash Eurobarometer 192: Entrepreneurship survey of the EU (25 Member States), United States, Iceland and Norway. The Gallup Organization for the European Commission, 2007. http://ec.europa.eu/public_opinion/flash/fl_192_en.pdf Flash Eurobarometer 283: Entrepreneurship in the EU and beyond. The Gallup Organization for the European Commission, 2009. http://ec.europa.eu/public_opinion/flash/fl_283_en.pdf Fudge, J.: Labour protection for self-employed workers. Just labour, vol. 3 (Fall 2003) http://www.yorku.ca/julabour/volume3/fudge_justlabour.pdf INEKO: Evaluation of economic and social measures in the 1 st half of 2007. Project HESO, Bratislava, 2007. http://www.ineko.sk/heso/projekt-heso-1-a-2-stvrtrok-2007 Kicina, R.: Study on the implementation of the principle of equal treatment of men and women engaged in self-employment and assisting spouses. Report for GHK Consulting Ltd and the European Commission, Bratislava, 2008 NADSME (National Agency for Development of SMEs): Tradesmen and the business environment in Slovakia. Bratislava, 2006. http://www.nadsme.proxia.sk/mediafiles//publikacie/zivnostnici_vyskum_2006.pdf NADSME (National Agency for Development of SMEs): Report on the state of small and medium-sized entrepreneurship in Slovakia in 2008. Bratislava, 2009. http://www.nadsme.sk/mediafiles//publikacie/vs_2010_sj.pdf TNS SK, TREND Magazine: Public perception of entrepreneurs. Survey conducted in October 2008, Press release, Bratislava, 11 February 2009. http://www.tnsglobal.sk/spravy.php?type=tlacove&id=254 Vagac, L.: Self-employment in Slovakia: a country perspective. Presentation for the EEO occasional workshop on self-employment, Brussels, 16 June 2010. http://www.euemployment-observatory.net/resources/meetings/vagac-eeoself-employmentseminar.pdf Online statistics provided by the Statistical Office of the Slovak Republic. http://www.statistics.sk Online statistics provided by the Central office of labour, social affairs and family. http://www.upsvar.sk 9