Harry Geels: Help! SMEs can't find staff or successors
Harry Geels: Help! SMEs can't find staff or successors
This column was originally written in Dutch. This is an English translation.
By Harry Geels
Small and medium-sized enterprises (SMEs), the backbone of our economy, are under pressure. Due to labor shortages and a changing work mentality among younger generations, many companies are struggling to find staff and even fewer successors. This has three major consequences for the economy.
In Germany, 99% of companies are SMEs. Around 230,000 of these are planning a business transfer, often without a clear exit strategy or successor. More than half of entrepreneurs are aged 55 or older. Furthermore, around 80% of SMEs say that it is difficult to find staff. We see similar problems in other Western countries. According to research by Barclays in 2023, 66% of British companies are struggling to find Gen Z staff.
Changing work attitudes
The labor market is tight, but there is more at play. Three-quarters of young people looking for their first job do not want to work in SMEs. They would rather have a flexible small business or work for large corporations that offer a better work-life balance, (international) career opportunities, and personal development. Research from the US shows that Gen Z managers also mention other issues, such as the ability to work remotely, equal and safe working conditions, and mental health support.
Figure 1
As mentioned above, the ‘purpose pivot’ of younger generations has major consequences for SMEs. In many countries, labor issues are further complicated by a ‘poverty trap’, i.e., the loss of various tax benefits when people work more. For the average employee with a salary of roughly €20,000 to €40,000, it is hardly worth working extra hours. Craft businesses with special (night) working hours in particular are struggling to find staff and successors.
Three consequences for the economy
The first consequence is that more small, mainly craft businesses will disappear. For example, 5% to 6% of all SMEs in Germany are considering closing down in the next decade. This percentage is likely to be similar in the Netherlands. Industry is moving to other parts of the world. On the flip side, the service sectors will continue to grow.
In terms of absolute turnover, but also as a relative share of the economy. In the US, 80% of the working population now works in the service sector.
A second consequence is that large corporations are accounting for an increasingly large share of the economy. In OECD countries, large corporations now account for 50% of GDP, while they make up only 0.2% of the total population of companies. This is relevant because smaller companies are generally more innovative. They often create dynamism in the economy through disruption. Consumers also do not usually benefit from large oligopolistic industries. Pricing is often too high and service too low.
A third consequence of the staffing and, in particular, succession problem is that small companies have to resort to private equity (PE). After the takeover, PE can ensure growth – often through mergers with similar companies that have also been taken over – and possibly a new exit to a large corporation or the stock market. Although PE is often portrayed in a negative light, it is often the only lifeline for SMEs in distress. In this way, PE also maintains economic dynamism.
What can be done?
We cannot blame younger generations for having a different work attitude and mentality. They are the product of our upbringing (‘curling parenting’), the spirit of the times, and probably also our prosperity, which allows them to demand more from an employer.
It makes no sense to create generational divides. The solution must be sought, on the one hand, in removing social friction and, on the other, in alternative staffing models.
Through education, we should make pupils and students much more aware of the benefits of SMEs for the economy and the disadvantages of large corporations, such as a lack of innovative strength and the frustration of a ‘level playing field’ that is in fact a ‘wealth transfer’ from consumers and small businesses to the shareholders and employees of large companies. The government should also impose fewer rules on smaller companies so that they are not or do not become ‘too small to comply’.
Furthermore, SMEs will have to ensure that they become attractive employers. They need to come up with solutions to the aforementioned issues that are important to young people. This requires more flexibility, especially in part-time work and training, and offering mentorships for high potentials, for example to prepare them for succession by giving them a growing shareholding. They can also polish up the image that real innovation (and therefore ‘purpose’) takes place in SMEs.
This article contains the personal opinion of Harry Geels