New economic analysis shows importance of UK small businesses to job growth

Demonstrating the importance of small business to the UK’s COVID-19 recovery, a new report from Xero, shows 410,000 small business jobs need to be created by the end of the year to return to the pre-pandemic jobs trajectory.

Using anonymised and aggregated data of hundreds of thousands of customer records as part of the Xero Small Business Insights (XSBI) programme, developed in partnership with Accenture, The Job Ahead report suggested that UK small business job losses have been almost double those in big businesses.

With small businesses employing over half of the UK workforce, a strong sector recovery will be needed to achieve significant employment growth.

But following the collapse of small business jobs down to -24.4% y/y in May 2020, jobs in February 2021 remained 10.6% below February 2020 levels.

The report found that women, employees aged 30 and under, and those in customer-centric jobs (such as hospitality) experienced particularly sharp declines in employment in the small business sector during the early months of the crisis, with growth continuing to lag into 2021.

However, the report also found that digitally connected small businesses faced far fewer declines in jobs (14.8%) than those with less connectivity (18.4%).

Small businesses that paid higher wages in each industry also saw fewer job losses. In May 2020, higher paying companies saw small business jobs down 13.5% compared to lower paying companies with jobs down 22.3%.

State of small business

Xero’s Small Business Index, a new single stat of economic health based on data on sales, jobs, time to be paid and wages, shows that despite this need for job creation, trading conditions are still difficult for many. In March 2021, the index remained below 100, indicating that overall small business performance remains below average conditions in the UK.

The index did increase by 8 points to 87 in March 2021, up 10.1% compared to February 2021, driven by improvements in jobs, sales, wages and time to be paid) during March 2021. The index gets broken down by the following:

• Sales rose 7.7% y/y, the strongest result since December 2019. But, this was inflated by the effects of weak sales in March 2020 (sales were up just 0.8% y/y in March 2020)
• Jobs fell 8.6% y/y as ongoing business restrictions limit the capacity of small businesses to start hiring
• Wages, as measured by average employee hourly earnings, rose 1.9% y/y which was the largest year-on-year rise since the pandemic hit. However, this is still below the pre-pandemic 2019 monthly average growth rate of 3.4% y/y
• Time to be paid, improved on average in March 2021, down 2.0 days to 28.5 days

“We can see first-hand what’s happening to small businesses and the impact on the whole economy and jobs. One thing we’ve noticed is that small businesses are so often overlooked by the Government. And this imbalance needs to be addressed. Only then will we see positive change,” said Gary Turner, Managing Director, Xero UK.

The ‘Job Ahead, small businesses and the global economic recovery’ report, is based on data from Xero’s newly launched Small Business Index, developed in partnership with Accenture, which uses the anonymised and aggregated data of over 300,000 customer records.

To read the full XSBI March results, including to download the data, go to www.xero.com/xerosbi. To find out more about how the Small Business Index is constructed see the background information and methodology.