1
Perceptions of Enterprise zones in Sweden
A case study on how entrepreneurs in North Rinkeby would perceive the introduction of an Enterprise zone program
ROBIN SHOURIE
Master of Science Thesis Stockholm, Sweden 2014
2
Perceptions of Enterprise zones in Sweden
Robin Shourie
Master of Science Thesis INDEK 2014:123 KTH Industrial Engineering and Management
SE-100 44 STOCKHOLM
3 Master of Science Thesis INDEK 2014:123
Perception of Enterprise zones Sweden
A case study on how entrepreneurs in North Rinkeby would perceive the introduction of an Enterprise zone program
Approved
2014-09-09
Examiner
Kristina Nyström
Supervisor
Hans Lööf
Abstract
The objective of this study is to examine how entrepreneurs in North Rinkeby perceive the Enterprise zone (EZ) program suggested by the Swedish government. The purpose of implementing an enterprise zone program is to revive the economic and social condition of deprived areas. This study analyzes the perception of this proposal by examining it on a regional level. What are the entrepreneurs’ knowledge about the proposed policy and their perception on how it will influence their decisions of employment or relocation? The method of the research is a case study of North Rinkeby area, which is one of the areas under consideration for becoming part of the proposal. Survey questionnaires were conducted in North Rinkeby, and the neighboring areas Tensta and Bromsten. 38 respondents were surveyed regarding their perception of how the enterprise zone proposal would influence factors such as employment and entrepreneurial start- ups. The results show that many of the entrepreneurs in the North Rinkeby area are in favor of a proposal such as the Enterprise zone program which the government have suggested. Many of the respondents had little or no knowledge of the proposal of the enterprise zone program.
Many of entrepreneurs found that the proposal to be unfair in terms of competition between firms in North Rinkey and its neighboring areas. At a regional level many of the entrepreneurs welcomed the proposal and agreed that if it were to be implemented, it would have a growth enhancing effect for many firms. This in turn, would lead to a positive change in firm’s employability and profitability. The respondents also thought that the proposal would increase the amount of start- ups in North Rinkeby if it were to be implemented. The investigators of this proposal have argued that relocation to the chosen area would be large from the neighboring areas. The result were mixed among entrepreneurs in the neighboring areas as how they view the relocation factor. Even though the enterprise zone program was recently rejected, many of the entrepreneurs in all of the three areas perceived this proposal as welfare enhancing.
4 ACKNOWLEDGEMENTS
I would like to thank my supervisor for giving me advice and feedback in every step of my work.
I am very thankful for the support I have received from my family during my thesis work and I am very grateful to both Jana Papadopolous and Said Osman for giving me support during my data gathering.
Robin Shourie Stockholm, 2014
5 Table of content
1.1 Introduction ...6
1.2 Problem Discussion and research questions ...9
1. 3 Contribution ... 10
1.4 Delimitations ... 10
1.5 Outline of the thesis ... 11
2. Enterprise zone program ... 12
2.1 History ... 12
2.2 Firm program structure ... 13
2.3 Incentive structure ... 15
2.4 An example of Social security contribution fees with exemption on payroll taxes ... 16
2.5 How to identify target zones ... 17
2.6 Anticipated consequences of the system. ... 18
2.7 Discussion regarding complementary support structures ... 19
2.8 Structures of existing enterprise programmes internationally ... 20
3. Economic and social outlook of the Suburb Rinkeby ... 22
4. Theoretical framework ... 23
4.1 Market outlook and competition from a regional perspective ... 23
4.2 Short run effects ... 23
4.3 Long run effect of labour and capital for a firm ... 27
4.4 The effect of starting a business ... 28
5 Literature review ... 29
5.1 Framework of enterprise zones ... 29
5.2 United States ... 30
5.3 Indiana ... 30
5.4 California ... 31
5.5 United Kingdom ... 31
6 Method ... 34
7.2 Tensta district ... 47
7.3 Bromsten district ... 53
8. Discussion ... 58
9. Conclusion and suggestions for future research ... 62
10. References ... 63
11. Appendices ... 65
6 1.1 Introduction
Socially deprived areas have a large impact on the economy as a whole and on individuals. The growing gap between included and the socially excluded is growing in fast phase in Sweden.
According to the organization for economic cooperation and development (OECD) in 2011, Sweden was the only industrialized country that had the largest differences in employment level between native and foreign born citizens among the industrialized nations and had problems at creating jobs for immigrants. It was shown that 76.6% of the native born had employment and 62.6% of foreign born had employment (Mattmar, 2014). Moreover, according to OECD, in 2013, Sweden is the country out of 34 OECD countries where the income gaps have increased fastest (Eriksson, 2013).
Some socially deprived areas have a large population of immigrants and the welfare gains for the whole society are huge if unemployment decreases. If social exclusion and deprivation diminishes then this will have a positive impact on the Swedish state finances. If unemployment rate decreases then this will have an overall positive effect for the country’s economy as whole (Sjödin, Bergman and Boman, 2012).
Social and economic exclusion also creates barriers for businesses and new startups in deprived areas. This makes it difficult to create an entrepreneurial atmosphere among the locals living in the deprived areas and these barriers may arise due to lack of business knowledge, skills, ideas or financing possibilities. In socially deprived areas the creation of an entrepreneurial atmosphere may be even harder to achieve, due to factors such as high crime rates or the lack of stable infrastructure used for a firms operation that would otherwise foster entrepreneurship in the area.
A forced (necessity based) entrepreneurial activity may also occur due to the fact of high unemployment rate among the locals in the deprived areas. Because there may not be any available jobs or it may be difficult for the individual to enter the labor market then these individual may be forced into entrepreneurial behavior. This may lead to individuals starting up businesses with no knowledge or very little knowledge of how to run and succeed with the business in the long run (Williamson and Williamson, 2011).
Previously some countries such as the United Kingdom, France and some states in the United States have targeted certain policies towards depressed areas in order to bring life to these areas again through improving the economic growth. This have been done through a combination of tax and labor incentives to firms operating in the depressed areas. These countries have targeted the depressed areas through these types of incentives and have named these areas as being enterprise zone programs. Countries such as France and UK are prime examples of countries that have implemented an enterprise zone program which have increased the economic growth in deprived areas. During year 2010 the Swedish Government appointed policy investigators to see if there was a possibility to implement a similar system with tax incentives to micro and small firms in neighborhoods (suburbs) which are considered to be socially excluded from the rest of the society, so called enterprise zones program (Sjödin, Bergman and Boman, 2012).
The suggested proposal of the enterprise zone program aims to reduce unemployment and helping smaller firms to grow. It does not only target suburbs with large segregation and social inequalities, it also aims at targeting larger areas such as towns that are of different sizes in Sweden.The government thinks that enterprise zone program might be an important long term solution for areas with severe economic activity (Sjödin, Bergman and Boman, 2012).
7 Some suburbs experience larger social and economic deprivation than other areas and a reason for why an area may be experiencing higher deprivation can be because it is difficult to enter the labour market. People who manage to get a job and a high income, eventually move to a better area. The people who are left in these areas are the ones who are still excluded in the society in terms of being long term unemployed and are living on government grants (Sjödin, Bergman and Boman, 2012). Sjödin, Bergman and Boman (2012) pointed out that most of the new locals moving into these deprived areas are people who are deprived in different social ways. Many of the suburbs that are socially excluded are often immigrant dense areas and one of the reasons for this is that the Swedish government immigration policy might have not been as successful in terms of integrating these areas with the rest of the society (Sjödin, Bergman and Boman, 2012).
Many municipalities in Sweden have had an objective of integrating immigrants with help of several of projects which would ease the integration. The overall effect of the integration policy have proven to be ineffective and the segregation between immigrants and the rest of society has grown. Furthermore, the integration policy have changed from being a social cohesion policy to
“a policy for the others” and therefore maybe a barrier for the integration itself (Kamal, 2006).
Immigrant unemployment is a large social and economic problem and creates many obstacles for a country which may lead to welfare loss for both a country and the people who are excluded from the society. Individuals in the deprived areas are not given a real chance to participate in the labor market. The country as a whole may lose productive input that can be turned into output in terms of product and services which will affect a country’s growth in the long run. Integration problem in term of foreign born individuals’ difficulties to enter the labor market creates large cost to the government, since an increased unemployment rate will increase social benefit payments. Sjödin, Bergman and Boman (2012) pointed out that the foreign born citizens are the ones that have increased potential for employment and needs to come into the labour market since these citizens would be able to relief the potential dependency burden of an older population that is predicted to increase over the coming decades (Sjödin, Bergman and Boman 2012).
The suggested implementation of a system with enterprise zones in different deprived parts of Sweden will therefore have the aim to increase employment and entrepreneurial behavior in form of promoting new business start-up and make the program attractive enough to make firm hire local employees. Sjödin, Bergman and Boman (2012) hope that in the long run this will lead to decreased social benefits dependency among residence and increased tax revenues from the firms and individuals employed in the enterprise zones to the government. The proposal was intended to be introduced from July 1st 2014 (Sjödin, Bergman and Boman 2012).
Sjödin, Bergman and Boman (2012) have suggested that in order for the areas to be considered as an enterprise zones area, the areas have to fulfill certain political and economic criteria’s. These are:
A certain percentage share of employment in the chosen area is lower than a general employment limit which is set by the investigators every year.
Certain percentage of people living in these zones that are on long term social benefits is above a certain percentage limit.
A certain percentage of the people in the zones that do not have a high school degree have to be above a certain percentage limit
These criteria’s are given in percentage limit that each area needs to achieve in order to be called an enterprise zone and to receive tax reliefs. The exact number of these percentage limit are to be decided from present figures for each year. It should be noted that these criteria’s involves
8 residents that are in the age group 20 to 64 years. For 2013 the limits was set to 47.2% for the general employment level, where the amount of employment in an area had to be below the general level in order to be part of the zone program. The amount of population on social benefits in an area had to exceed 7.4% in 2013 and the amount of locals in each area that did not have a high school education had to be above 30.5%. The enterprise zone program will be based on the requirements stated above but also on a population requirement. An area should have at least 4000 inhabitants in order to be considered as an enterprise zone. The proposal have suggested that the relief of social contribution fees in the framework of enterprise zone program should be given to entities with a fixed time limit and at the same time with the objective to make sure that the overall system with reliefs become attractive enough to enhance economic and social growth both for firms and the residence in the chosen areas. The time limit for the incentives has to be appropriately set since a long time frame for receiving the incentives may give the government large losses in tax revenues. This is due to the forgone revenue the government loses by giving relief incentives to firms and if the relief incentives are given in a very short period it may not give the desired results. Calculations done by the Swedish growth authority concluded that North Rinkeby could be defined as an enterprise zone since this area achieved the criteria’s for population limit and other general criteria’s mentioned. (Nordlöf, and von Seth, 2013). The population of North Rinkeby in 2013 was 15 845 inhabitants (Nordlöf, and von Seth, 2013). Figure 1 display the location of North Rinkeby in the Stockholm area.
Figure 1: The location of North Rinkeby
9 1.2 Problem Discussion and research questions
Many deprived areas that exhibits both economic and social exclusion lack the proper growth enhancing support and this often lead to lower economic prosperity for the areas and therefore negatively affect the entrepreneurial activities and employment factor. This may give rise to lack of social security for locals (Sjödin, Bergman and Boman 2012). The government has suggested an implementation of enterprise zone program which is assumed to improve social and economic conditions of the deprived areas (Sjödin, Bergman and Boman 2012). Through available data the researchers have recorded and examined the effect of enterprise zone program in other countries by looking at how this program influence factors such as employment and enterprise creation over a longer period. The Swedish proposal of enterprise zones have examined and created a layout of how the program should be structured through support of previous research done in other countries and have analyzed what type of tax incentives would fit a enterprise zone overall if it were to be implemented in different areas in Sweden.
We know little about what knowledge the entrepreneurs in the area have about the suggested proposal and its effects. There exists little information and there have been explicitly no research done of how entrepreneurs in North Rinkeby would perceive such a proposal if it were to be implemented there. In addition, there is little knowledge on how the proposal is perceived among the entrepreneurs operating in neighboring areas of North Rinkeby. The target area is in this case the area of North Rinkeby and the neighboring areas are Tensta and Bromsten. In order to investigate this the following research questions have been formulated.
What are current entrepreneurs/ firm owner’s knowledge about the suggested enterprise zone program?
Do existing entrepreneurs in the area support the idea of introducing enterprise zone program?
To what extent do they perceive that this will influence the regional development (integration, future employment, profitability new venture creation).
To what extent will this proposal influence competition between North Rinkeby and its neighbouring areas? ( effect on the businesses)
This paper is using a holistic approach in order to determine how this proposal would be perceived, therefore there are a set of sub questions that will be answered. This will give a more comprehensive view of how entrepreneurs in North Rinkeby would actually perceive the enterprise zone program. These question are interesting and highly important since these question will answer how entrepreneurs’ thinks about this proposal in several of angles and how competition would perceived to be effected at regional level. The entrepreneurs’ perception regarding enterprise zone program gives an indicator of how firms would think and react if this were to be implemented. The entrepreneurs perceptions give a realistic view of how the proposal of the enterprise zones are seen and make this paper complete. Their perception gives an interesting picture of how entrepreneurs in a targeted area actually see this proposal.
In order to answer these questions, surveys to entrepreneurs in the North Rinkeby area and the surrounding neighboring areas have been conducted. Furthermore, this thesis includes a theoretical discussion about the effects of the proposal and why it is suggested to be implemented and what social and economic factors it is perceived to target. This thesis is a case study of North Rinkeby and will analyze the perceived effect of the proposal in the area and have been elaborated with theoretical section and literature review of previous studies done regarding this proposal. The
10 empirical part was done through a study focusing on North Rinkeby and its neighboring areas through examining the results from the survey questionnaires followed by a discussion and conclusion regarding the findings.
1. 3 Contribution
The discussion regarding deprived areas has been a topic with mixed opinions where immigration along with integration policy has been associated with the deprived areas. Integration have been based on reallocation of resources which have created social cohesion in a society. However, over time the integration policy have changed and have only aimed at one group and not to the whole society and it has therefore contributed to more segregation in the society (Kamal, 2006). Around 55 % of the children in Rinkeby lives in poverty and the amount of unregistered people are well above the actual number in many of the deprived areas. The challenges are great in this area where locals does not have the same opportunities to participate in the society as the rest of the Stockholm areas this especially involves children (Kellecioglu, 2012).
This thesis focuses on entrepreneur’s perceived perception and investigates how this enterprise zone program would perceive to change entrepreneurs business behaviour in terms of factors such as employability, profitability and competition. This thesis will contribute by showing how entrepreneurs in North Rinkeby perceive the proposal and it might be valuable knowledge to policymakers and government agencies if the government decides to implement an enterprise proposal in North Rinkeby later on in the future.
1.4 Delimitations
In May 2014 the Swedish government decided to drop the proposal of enterprise zones program which was meant to be implemented in July 2014. The reasons for why it was dropped was that there were objections raised during preparation and discussion with European commission regarding the enterprise zone programs implementation. The system was considered to involve too much of administrative burden for the firms involved in this proposal and that it would be too difficult for firms to achieve the requirement in order to get the reliefs. Therefore it would not be an appropriate tool for increasing employment or entrepreneurial activity (Karlsson, 2014). A further work with the structure of enterprise zones may imply a more lengthy process in terms of formulating it correctly so it could be adaptable to each of the chosen areas. Government states that even if the proposal were to be changed so it did fit the requirements of the EU committee, it is still unclear if and when a proposal of enterprise zone can be executed. Therefore it is unlikely for a modified proposal to be suggested in the near future (Karlsson, 2014). The fact that the proposal was dropped implies that this study has been done partially when this proposal was still active.
11 1.5 Outline of the thesis
Chapter 2 will present the proposal of introducing enterprise zones in detail. Chapter 3 will present the social and economic outlook of North Rinkeby. Chapter 4 presents the theoretical framework of enterprise zone program thereafter Chapter 5 will present a literature review section of previous studies done on several of enterprise zone programs. Chapter 6 presents a methodology section.
Chapter 7 will present an empirical section. Chapter 8 presents a discussion section of the empirical section which is shown in previous sections. Chapter 9 will present the conclusion and suggestion for future research.
Ch. 2-Proposal of introducing enterprise zone. Ch3-present social and economic outlook of
North Rinkeby
Ch. 4-Theoretical framework. Ch5-literature
review section Ch6- Methodology section.
Ch. 7-Emperical section of the chosen area North
Rinkeby and its neighbouring areas
Ch. 8 Discussion
Ch. 9-Conslusion and suggestion for future
research
12 2. Enterprise zone program
This section presents how the enterprise zone program proposal is formed and what benefits are given within the proposal. The section also present structural layout of the proposal, such as requirements and conditions.
2.1 History
The proposal of Swedish enterprise zones was first suggested in 2010 by the government consisting of an alliance of parties including the Moderate Party, the Centre Party, Liberal Party and Christian Democrats. The Swedish government wanted to implement a system with tax incentives to firms in suburbs which are subject to social and economic exclusion. The aim with this proposal is to try to create jobs and increase the welfare of areas that have employment level far below the national average. Sjödin, Bergman and Boman (2012), which has written the government investigation underlying the proposal, assume that enterprise zone program will motivate the chosen areas residents to become entrepreneurs and open their own business. Through this proposal the investigators hope that the number of start-ups can increase within the area. The enterprise zone program is aimed at making it cheaper for firms to have and employ labor as compared to firms operating outside the chosen areas. Sjödin, Bergman and Boman (2012) states that enterprise program would not be breach against any regulation concerning competition at a European Union level between countries. However there have been indications that this proposal may give rise to uneven competition at the national and local level between non zone firms and zones firms. With this proposal the government aim is to address exclusion, where exclusion in society exists in certain neighborhoods where segregation is the major obstacle. The Swedish governments aim is to improve labour market integration in order to achieve the main objectives of the Swedish integration policy. Sjödin, Bergman and Boman (2012) made it clear that foreign born have less opportunities in entering the labour market as compared to other individuals and therefore must be given a chance to come into the labour market. As previously mentioned the Swedish government have decided to drop the proposal after the consultation with the European commission since it was found that it would be difficult for firms to meet the requirement and that the program have to many structural problems (Sjödin, Bergman and Boman 2012).
13 2.2 Firm program structure
Firms that are supposed to be included in the zone program are those who are sole proprietorships and business run with unlimited liability. The enterprise zone program should include companies which are owned and formed as partnership where 1-20 people are controlling and financing the business and have unlimited liability. Firms that are willing to locate their whole business from a non-zone area to an enterprise zone should also be included. One of the main objectives of the proposal is to promote entrepreneurial spirit among the residents through starting their own business. Therefore the enterprise zone program will include the start-ups as well. In order for this proposal to be implemented and firms in the area to be accepted in the program the firms needs to follow the European Union definition of what a micro and small firms looks like. A firm should be either a micro entity or a small size entity. Where the EU definition is stated as:
Company size Employees Turnover
Small 50 or less €10 m or less
Micro 10 or less €2 m or less
The reason why Sjödin, Bergman and Boman (2012) recommend neglecting large and medium size firms is because it would mean that these firms would receive large cost advantages. The forgone revenue from incentive reliefs would be higher if larger firms were to be included.
Companies that are not included in the system are companies involved in farming, agriculture and fishing. This is because some markets have to follow the European laws and regulations and with markets concerning farming and agriculture, the European Union want to achieve common guidelines with these markets. Therefore all states under EU have to refrain from actions that may damage these markets (Sjödin, Bergman and Boman 2012).
Firms that are somehow directly or indirectly connected to one or more business organizations and are not considered as independent needs to provide firm specific information regarding the total amount of labour force. These firms also need to provide information about how the business has financed itself previously and how the firms are connected to each other. Franchise companies can both be seen as independent and dependent but it rest on how the franchise agreements are set in regards to how much influence the franchisee have on the franchiser (Sjödin, Bergman and Boman 2012).
The main requirement that all types of small and micro firms have to follow in order to be implemented and receive benefits over a longer period is that firms have to operate their business at a fixed location which needs to be inside the zone. This requirement can be adjusted and this is due to the definition stated above regarding connected businesses and franchisees. The second requirement that the small and micro firms need to satisfy is that at least one fourth of the firms working hours needs to be done by residents residing in the zone program area. Even though an employee does not achieve the living requirements of residing in an enterprise zone area at present, the employer can still include the employee in the enterprise zone, if the employee has achieved the living requirements maximum six months earlier (Sjödin, Bergman and Boman 2012). .
Sjödin, Bergman and Boman (2012) suggest that firms involved in healthcare such as personal assistance should also be taken into consideration and should be part of the enterprise zone program. This is because the employees of these firms work both with people inside the zone program and outside it. The working locations within the zone areas should be seen as a permanent establishment for the firms operation and should be included in the program as long as these firms
14 comply with the main requirements. Similar consideration goes for small firms working in construction industry (Sjödin, Bergman and Boman 2012).
The program should be implemented so it has a maximized impact on employment in the areas.
The tax incentive that the program brings to the entrepreneurs in the society should be installed in the best way as possible in terms of the cost structure of the program. Sjödin, Bergman and Boman (2012) have pointed out the problem regarding competence level of what some firms in the enterprise zones may require from the labour force living in the area and the actual competencies that the labour force have may be different. Due to this issue they have recommended that the program should not put too much emphasis on the employees’ current living conditions when it comes particular competence a firm needs (Sjödin, Bergman and Boman 2012).
In their suggestion, Sjödin, Bergman and Boman (2012) have closely monitored and followed the French system Zones Franches Urbaines (ZFU), which have adopted a system with requirements on firms employing residents living in the zones. Sjödin, Bergman and Boman (2012) have recognized that the French program is the one that the Swedish enterprise zone program needs to follow and focus on in terms on structural imitation and characteristics. This is why there should be a living requirement and it should be adjusted to a certain level. The information regarding ZFU program can be found at the Swedish proposal of enterprise program (Sjödin, Bergman and Boman 2012). Additional information and facts regarding French enterprise zone (ZFU) can be found in the journal “Do unemployed workers benefit from enterprise zones? The French experience”
(Gobillion, Magnac and Selod, 2012). Further facts and studies regarding ZFU will be presented in sections 2.8 and 5.6.
The living requirements for employees in the area can be interpreted in different ways. Therefore it have been concluded that a certain amount of the working hour done in a firm should be done by employees living within the designated zone. In this case a firm can only employ 200 working hours per month for each of their staff. This is due to the fact that firm should not be able to abuse the system through forcing an employer who lives in the designated area to work a lot more than regular working hours (Sjödin, Bergman and Boman 2012).
The limitation to micro and small firms in local areas may have smaller effect on the overall employment than without these limitations. With a limitation on firm size there may be a larger risk of unfair competition at a local level. A limitation to micro and small size firms also gives the policy makers more administrative burden and there may also be application problems as this limitation is set. But firms that employ less than 19 employees have had higher tendencies to offer more employment opportunities to the labour force under an incentive scheme. This would mean that companies would be more interested in employing when tax incentives are given. These requirements that are suggested for the system are set so it increases the employment effects.
However the benefits of such a system have to outweigh the negatives (Sjödin, Bergman and Boman 2012).
15 2.3 Incentive structure
Sjödin, Bergman and Boman (2012) have suggested a tax incentive scheme for firms participating in enterprise zone program. The firms participating in the enterprise zone program would be relived from paying social security contribution fees for a period of five years and thereafter firms have to pay half of the social contribution fee for additional two years. The Swedish tax authority should administrate the tax deduction for firms who participate in the enterprise zone program.
The Swedish tax authority should be the ones who control whether the firms comply with the regulation when it comes to receiving the incentives. Sjödin, Bergman and Boman (2012) have pointed out that a system with enterprise zones with relief of social security contribution fee should contain relief on payroll taxes for firms, relief on employer contribution fees and relief of own fees. The time span as mentioned above should be a full relief for five years and thereafter firms have to pay half of the amount for two years more. It can be ineffective to give reliefs to firms that have high wage costs. Therefore a monthly relief should be limited to an amount for each employee which corresponds to the employers’ contribution fees and the payroll taxes that is attributable to a gross salary of half of the income base per month (Sjödin, Bergman and Boman 2012).
Sjödin, Bergman and Boman (2012) hopes that firms with lower labour cost will employ more local labour. This will in turn lead to increase in employment opportunities in the zones. The quantity of jobs that will be created will depend on how much of the employees relief is attributed to wage increase of the employees. If a large portion of the lower costs are attributed to wage increase in the employees wage then the firm will probably not employ new labour. Another opportunity would be that the lower cost would increase the firms overall profits in longer term. It is believed that with this program and with these types of incentives the overall wages will not increase and therefore not negatively impact the level of hiring. An estimation was made, that if the program were to be implemented this year (2014) then the program would cost 112 million SEK which the government loses in tax revenues due to the tax incentives by implementing a zone program. Therefore Sjödin, Bergman and Boman (2012) suggest that these types of cost that the program brings should be covered by increasing the overall payroll taxes with 0,01 percentage points.
In 2010 the business council in Sweden surveyed small enterprises in Sweden regarding what types of reliefs and incentives entrepreneurs would actually prefer in terms of increasing economic prosperity for them and for the surrounding area they are operating in. They were asked different questions regarding how several of changes would affect their entrepreneurial activity and if they were willing to hire more labour. The respondents were asked which of the following below alternatives would motivate the firms to hire more employees.
The following alternatives were given:
Alternative 1 - A total exemption from corporate tax under a limited time period Alternative 2 - A total exemption from taxes on income of a business organization
Alternative 3 - A total exemption from employer contribution taxes under a limited period
Almost half of the respondents chose the last option, and 31% chose alternative 1. While the remaining chose alternative 3. When the respondents were asked what type incentive would make them move their operation, 11 % of the respondents would move their business to an enterprise area, if a total exemption from employer contribution tax are given. 9% would only move if
16 exemption on tax on income of business organization were given and 8 % would only move if exemption of corporate taxes were given (Sjödin, Bergman and Boman 2012).
The purpose of enterprise zones is to bring an increase in economic activity and lower unemployment within the designated areas. Therefore one way of lowering the unemployment rate is to try to increase the demand of the labour force in these areas and this can be done through lower the labour cost for the firms when they employ people living in these areas. These sort of incentives may make firms motivated to follow the working requirement of at least one fourth of the total working hour should done by the labour that is living in the area. It is heavily emphasized that this type of program needs to be put forward in a way so it will decrease the unemployment rate but at the same time give attractive incentives for the firms so they will adopt and follow the enterprise zone program requirements. This study explicitly investigates of how these growth factors may be effected by a proposal of enterprise zones if it were to be implemented (Sjödin, Bergman and Boman 2012.
2.4 An example of Social security contribution fees with exemption on payroll taxes
In order to get an idea about what this proposal would imply in terms of improving the firm’s financial situation. The below example shows what happens when a firm receive relief of payroll taxes. The example in this case is with a monthly net salary of 27 300 SEK which was equivalent to a half income base amount in year 2012. With this net salary the employer normally pay social contribution fees of:
27 3000 × 0, 3142 = 8578 SEK Where the total cost will be;
27 300+8578 = 35 878 SEK per month,
This monthly cost for a firm to have one employee without any incentive would be 35 878 SEK for a firm per month. With implementation of enterprise zone program and with incentives the firms saves;
5791 SEK
27 300 × 0, 1021 = 2787 SEK 2787 + 27300 = 30087 SEK
So under the incentive of payroll taxes the firms cost reduces to 30 087 SEK for the relief from payroll taxes for a firm with just one employee. The Firm would save 5791 SEKr (Sjödin, Bergman and Boman 2012).
17 2.5 How to identify target zones
The zones are originally taken from the so called SAMS zone areas which the Swedish government created two decades ago1. Some SAMS areas in Sweden are too small to be considered an enterprise zone from a population perspective. The SAMS areas that have a population under 4000 inhabitants and if the areas are geographically close to each other, then these SAMS areas should be put together, to become a zone. So in a population perspective a SAMS area can be qualified as a potential zone if the zone have a population of minimum of 4000 inhabitants. Once these SAMS areas are set to a proper size, then these hypothetical areas needs to comply with four qualifications that needs to be meet in order to be considered as enterprise zone as mentioned in the introduction. The reason for why these limitations and requirements are needed is due to that a system with enterprise zone is supposed to create appropriate measures in the society and stimulate the labour market. The reason why investigators have suggested an age span of 24 to 64 in these four criteria’s which are given in the introduction section, is because the population outside these ages generally are not active in the labour market. The investigators suggests that the criteria’s used to determine the enterprise zones and the decisions regarding the geographical limitations of the enterprise zones should be made by the Swedish growth authority every five years (Sjödin, Bergman and Boman 2012).
1 Sweden has 73 areas that are qualified as SAMS zones.
18 2.6 Anticipated consequences of the system.
The investigation by Sjödin, Bergman and Boman (2012) has anticipated that the circumstances of a firm and its labour force may change as it always does in a dynamic environment. The firms’
specific requirements given by the enterprise zone program do not mean that each firm in the designated area needs to achieve and follow the requirements blindly every time. This is because in some circumstances the firm’s obligation to follow the set of requirements can be out of control for the firms to follow. There can be a situation where one of its recent employed employee who lives in a designated area and work for a firm in that area decides to move to an area outside the zone. In this case it would mean that the requirement on firms’ employees living in the area is not followed by the firm and the firm will then lose the incentives. If the system allows the living requirement to be fulfilled only once and lets the firms receive the incentives for an whole period, then the program may be considered to be too mild and may lead to that firms involved in the program abuse the incentives structure which is provided by the program. The risk would be that the firms would only occasionally fulfil the requirements and still receive the incentives over a longer period (Sjödin, Bergman and Boman 2012). By controlling the living requirements from the government’s side would mean that there would be large administration hurdles and costs. In order for a firm to avoid events which may force firms to adapt a change in its cost structure which would make the firms to lose the benefit of the proposal the investigators suggested that incentive in the program should be given even though the requirements are not fully fulfilled. However, then the incentives should be limited to a period.
There may also arise situations where firms in these designated areas are subject to unforeseen events that may impact a firms operation and may lead to that the firms is not be able to meet the two requirements set out for all firms that are operating in the designated areas and are bound to the program. These unforeseen events may be due to fire or other accidents that causes the firms large loses. These loses may be to an extent that the firms may not be able to use their premises to operate their business in the designated area and it may be difficult for the vulnerable firm to find new premises to run its business in the designated area (Sjödin, Bergman and Boman 2012).
The risks and chances for such unexpected accidents for the firm to be excluded of the incentives which the program provides are small and therefore should not be regarded as a specific regulation.
There are no risk for firms to be excluded from the incentives if there is a temporary labour change in the firms’ internal operation which lead to uncertain consequences which directly affect the requirement. The incentives should also be given to individual entrepreneurs or start-ups were the source of employment and profits only come from the operation within the designated area. Sjödin, Bergman and Boman (2012) states that the deduction from the employer contribution fees should be the wage cost that are on the employees’ wages who are working within the area. The working area can be defined as a place where the worker operates from in the designated area and the employee can only have one employer. There are some clarification regarding the employees working location which the investigators address. Those clarifications are that if the labour work is done on different locations both inside and outside the area, the work rule statement states that it is the location where the employee picks up and drops off its working material or where employer or employee prepare or ends its working day, is the location that should be the fixed operation for a firm. (Sjödin, Bergman and Boman 2012). In terms of competition, Sjödin, Bergman and Boman (2012) have discussed that the enterprise zone program and its incentives may lead unfair
19 competition against other firms located in different areas. Furthermore, they are also widely aware of the amount of labour force in an area that is not considered in the zone areas may have fewer jobs to search for if this proposal were to be implemented and if the firms move their operations to the zones (Sjödin, Bergman and Boman 2012).
2.7 Discussion regarding complementary support structures
Sjödin, Bergman and Boman (2012) states that incentives to firms in the enterprise zone areas should be implemented in order to stimulate the labour force demands in the chosen zones.
However, it is believed that these incentives should be combined with other measures in order to handle the problem with social and economic exclusion. The suggested measures that are enhancing the job and start-up opportunities to individuals in these areas should be implemented.
One type of measure that have been suggested to be implemented is the enterprise offices (nystartskontor) which would make the program more effective. In 2009 the Government in Sweden implemented enterprise offices in areas such as Skärholmen, Södertälje, Botkyrka and South Stockholm. This type of support could be seen as a complement to the program. The objective of these enterprise offices is to give individual support and guidance to people in the targeted areas (TT, 2008). These offices will help the individual to ease the possibility to enter the labour market and help individual to open their own businesses through education (Näringsdepartementet, 2010). Therefore it has been suggested that coaching to individuals may be needed which the enterprise offices offers (Sjödin, Bergman and Boman 2012.
20 2.8 Structures of existing enterprise programmes internationally
French ZFU zones
The French ZFU program was first introduced in 1997 and targeted several areas in France and the ZFU program had to follow the same requirements that the European Union had set out. Those are the common definition of the size of a firm both in terms of the amount of labour each micro and small firms are allowed to have and the amount of turnover each micro and small firms needs to have. These European Union requirements on firms is mentioned above in section 2.2. External firms cannot own more than 25 % of a small or a micro firm in the zone which have more than 250 employees or have a yearly turnover that surpasses 50 million Euro. One fourth of the yearly turnover for firms needs to come from its customers who are residents in the ZFU. All business that are included in the zone program must have a single fixed location which needs to be located within the zones. In 2012 the policy makers changed the regulation on the employee requirements where the requirements stated that individuals who started their own business and that moved their business within the ZFU in the beginning of year 2012 needs to at least have half of their workforce living in any of the ZFU zones (Sjödin, Bergman and Boman 2012).
Firms in the ZFU zones are exempted from social contribution fees. In order for the firms in France to be part of the ZFU, they cannot have any outstanding social fees debt prior to entering the ZFU.
Beside the requirements just mentioned above, there are some additional requirements that firms need to comply with in order to receive the incentives. The employee must fully or partially be working in a ZFU zone where the firm has it fixed operational location or if the employee from time comes to the location in order to pick up equipment related to the employees work or other types of administrational matters. The exemption from social security contribution fees last for five years and firms cannot combine exemption from social security contribution fees given in the program with other exemption of fees not give by the program. Firms in the ZFU program are fully exempted from corporate tax on their profits for period of five years. This also includes property taxes for a period of five years (Sjödin, Bergman and Boman 2012).
United Kingdom
The United Kingdom’s zone program started in the 1980s and have since been modified and the number of areas have expanded over the years. The United Kingdom’s zone program provides both existing firms and new firms exemption from certain property taxes and made it more convenient for firms operating in the zone to receive building permits from the local councils.
Moreover in 2011, it was suggested that firms in the enterprise zones in the United Kingdom was going to receive incentives of local taxes on properties, which are not considered residential properties. The policy makers in the United Kingdom’s enterprise zone program has suggested to give the firms operating in the area help with their business through provide them with access of high speed internet. One of the main purposes for establishing enterprise zones was to attract establishment of firms’ subsidiaries into these deprived areas. The UK enterprise zone program has had success in terms of attracting different types of investments from other areas in the country.
This has in turn created positive results in terms of larger positive effect on the both local
employment and the overall business environment (Sjödin, Bergman and Boman 2012).
U.S. Enterprise zone programs of Indiana and California
In the United States there are several types of different enterprise zones, which are regulated both at a national level and a local level. For example some areas in the Indiana State are to be
21 considered as an enterprise zone they therefore had to achieve certain criteria’s. The considered area should have an unemployment rate of 1.5 times higher than the average of the overall state.
The people of a deprived area in the Indiana state need to be at least 25% poorer than the average individuals in the State. There is also a population limit where an area within the Indiana State should have a population between 2000 to 8000 individuals. The relief given to enhance the labour market in the areas was measures such as tax deduction on wages, which the firms could do with up to 10% of the wage for an employee residing in the zone areas (Sjödin, Bergman and Boman 2012).
The State of California implemented the enterprise zone program in 1985 and had similar criteria’s as the Indiana state concerning population amount, unemployment level and similar levels in terms of poverty rate of an area in comparison to the overall state (Sjödin, Bergman and Boman 2012).
In addition, the tax reliefs’ incentives involved tax deduction on its employees for the firms in the zone and the zone program also support businesses by giving business loans to the firm operating in the zone. Firms in these areas are given tax credits because of employing labour at hourly basis.
Firms were allowed a full claim of tax credit of half of the employees’ wages in the initial year of operation. The tax credit incentives to firms are effective since the firms can claim credit equal to sales tax or used tax paid to purchase non-residential properties of an amount up to 20 million dollar. For a firm to deduct the tax on the property purchased it must be built in the state of California. Moreover other types of deductions are available that firms can do is that it can deduct the expenses from its purchased property if the firms operates or invest within the zone. This deduction can be seen as a business expense in the first year when the property has been active as a service or operational space. Policy makers have argued that this can provide the firms with more up front liquidity. The initial amount a firm is allowed to deduct is 40 000 dollars (Fishbein and Keller, 2009).
22 3. Economic and social outlook of the Suburb Rinkeby
This part explains how North Rinkeby regarded at present and what social and economic factors made North Rinkeby to considered enterprise zone.
Many immigrants adult’s roles changes once they are settled in Sweden. This may be because the children in these families are able pick up and learn the Swedish language quicker and easily gets a knowledge advantage, while the adults ends up confused. This alongside with a failure of the local school system makes the youth not eligible to seek for more advanced studies in order to start a career and proper life. Other problems occurring that promotes the path of restless criminality are that many of the youth centers have a maximum age limit and therefore neglects youths in the ages of 24-25. Even though there are some job related projects for these teenagers it may even be too late for some of these since some youths are very deep into criminality (Ullenhag, 2012).
North Rinkeby is located in the Stockholm area and is highly characterized by social exclusion where very few are employed and many of the population residing in the area are on long term social benefits allowance. Moreover the schooling results for youth and teenagers in Rinkeby area is low compared to average. Many children grow up in Rinkeby with parents who are unemployed and with a surrounding environment with people not working. Many of the children have lost their motivation and their belief that they will become employed and this makes them feel that they are outside the society. It should be noted that most of the people who become successful moves from the area. This is due to the fact that the actual social and economic situation does not improve in North Rinkeby (Regeringskansliet, 2013).
The highest amount of unemployed who are between 18-64 years in Stockholm were those who are residing in Rinkeby/Kista areas. Moreover the amount of people that are without work and were looking for work were individuals residing in Rinkeby/Kista with a total of 11, 9 %. During year 2012-2013 the Rinkeby/Kista areas had the largest increase in unemployment compared to other areas in Stockholm. The North Rinkeby/Kista areas had the largest youth unemployment in the Stockholm district during 2012/2013 (Wahlman, 2013).
The crimes in Rinkeby area have mostly been mixed with all types of crimes from burglary to heavier criminality. Moreover in 2008 there were around 2719 notified complains reported to the police. The amount of assault cases in 2008 was much higher in Rinkeby per 1000 individuals than in the area of Stockholm city. This shows that there is clear social and economic uncertainty in this area both for people residing in the area and businesses operating in the area (Malm, 2009).
23 4. Theoretical framework
When evaluating how a policy proposal will effect a specific area in terms of growth, we need to look at factors that will be effected by this policy. These are labour market effect in terms of demand of labour and the competition effect of a policy a proposal of enterprise zones will have on both a local and a regional level when tax breaks are introduced. Theory below present theoretical framework for the proposed policy.
4.1 Market outlook and competition from a regional perspective
Local markets differ significantly from national markets and one reason is that the local markets overall demand is smaller compared to larger markets and therefore have fewer firms competing with each other. Since the investigators of this proposal suggested that enterprise zone program would be implemented in many areas in Sweden this proposal therefore concerns many mixed markets with different local competition attributes. In order to examine what the effect of program implantation would have on the firms operating in the North Rinkeby area. I assume that the market may be characterized by a competitive market structure. In such a market every actor in the market sees the price as fixed and this price is also the market price. The individual firm is small relative to the market and has no actual influence on the market price. A market where the firms are seen as price takers and where the market concentration is low with many actors in the market the marginal revenue curve will represent the market price. When all firm in the market are producing at an optimal quantity where MC = P then, no firms can increase their profit by changing their quantity. If firms do a quantity change, then this change will have an overall negative effect on the profits for the firms. However, if the marginal cost does not equal to price then the firms have the possibility to increase their profits or reduce loses. This is done through changing the amount that each firm produces. This section will analyze the input change of firms and it will examine how large effect this proposal will have on the inputs decision for firms. An individual firm inputs such as labour and capital which is used in production of output depends on how much quantity each firm want/needs to produce. The input will depend on the demand of the initial product or services (Sjödin, Bergman and Boman 2012).
4.2 Short run effects
In the short run, one of the inputs is fixed and therefore firms can only change one of the inputs in a production process. However this theory will focus on the effect on labour, as if the enterprise zone proposal would be implemented. The main purpose of this proposal would be targeting unemployment in these deprived zones (Sjödin, Bergman and Boman 2012). The theoretical analysis will show how the changes in labour demand will affect the firm’s decision when the firm has made input decisions concerning labour. For instance when a firm may choose either to acquire additional unit of labour or if the firm decides to keep its labour constant or if the firm decides to reduce its labour by one unit. Where the one unit of labour force here would be an hour of work done by the labour force (Sjödin, Bergman and Boman 2012). A firm’s labour demand in the short run is decided upon the cost of acquiring an additional unit of labour which is also marginal cost of labour (MCL). Revenue that is created for the firm by the employment of additional unit of labour is also the value of the labour marginal product which is denoted (VMPL). The cost for the firm to acquire additional unit of working hour is included in the (MCL), as firms adds more unit of labour force then the (MCL) increase for the firm. This cost is the sum of all cost that includes cost associated with acquiring additional hour of work done by the labour force and these costs can be considered to be the labour force wages (W). A firms value of marginal product of labour as mentioned above consist of a revenue increase which is created through deploying an extra hour of work. This shows how much larger the production a firm would get by employing an extra unit of labour force and what each unit of the firms production is currently worth. A firm increase in
24 production of hiring an additional unit of labour and decreases with each additional unit of labour.
This in turn make the marginal product to decrease and the total effect for the firm would be that each additional labour within the firm has less capital to work with. This in turn creates constraints on the firms’ production and makes the firm to produce less output per unit of labour. VMPL is also depreciating since it is a depending function of MPL time market price. If a firms (VMPL) is greater than the wage (W) then the firms hire an extra unit of labour and the firms’ revenue stream would be greater than the operational cost of the firm. In turn the firm’s profits would go up. This would in turn lower the gap between (VMPL) and the (W), firm would employ additional unit of labour if there is still a gap remaining until (VMPL) is equal to (W) and at this point the optimal labour force for a firm is reached, as it can be seen in the graph 1 below (Sjödin, Bergman and Boman 2012).
Graph 1, reach of the optimal labour force
Source : Sjödin, Bergman and Boman 2012 p. 80-81
If firms receives support in forms of incentive such as social contribution fees, it will give the firms lower labour cost. Then the line moves from W0 to W1. T and there is a new optimal quantity for labour force, which is higher than before as seen in graph 2 below (Sjödin, Bergman and Boman 2012).
SEK
WO
L
*
VMPL
Amount of labour
25
Graph 2, effect of lower labour cost
Source: Sjödin, Bergman and Boman 2012 p.80-81
The proposal aim to lower firms wage costs such a lower labour costs to firms with the objective of increasing the demand for labour. This may not always work as the policy makers want. Since a lower wage cost to the firms may instead lead to an increase in the level of wages which the employee may demand. This effect is called the carryover effect. . This lead to that firms are not willing to hire new labour. In this case, there is no change in the labour cost and therefore there the amount of labour demanded by the firm is constant. This would mean that a incentive would lead to lower governments tax revenues and therefore lead to higher wage level for existing employees in the firm (Sjödin, Bergman and Boman 2012).
How large this carryover effect will be depends on how the supply and demand will look like in terms of elasticity, where supply will be the employees and the demand will be the firms wage elasticity. This effect is also due to other factors such as to what extent a firms wage negotiations are centralized and how the fee reduction of the incentives effect the national unemployment allowance. The overall unemployment rate in country has clear influence on the wage supply.
A high rate of unemployment creates obstacles for possibilities for successful wage negotiations between the employer and employee. Therefore the effect of a tax incentive would have a larger positive impact on employment when the unemployment rate in region or a country is fairly high.
A positive change in the cost structure for a firm which is operating in a highly competitive market makes it possible for firm to sell its product at lower price and this leads to a change in the firms internal production processes where the quantity for the good increases. This in turn would give an increase in the demand on hiring more labour and it would be impossible for the firm to pass
W0
W1 VMPL
L0* L1 Amount of labour
SEK K
26 over the reduced labour cost to the labour force. If firms would do a passover to the labour force then the firm would charge a higher price for having its labour force compared to other firms. This would mean that the firm has to charge a higher output price than what the competitors’ charges.
The theory states that a regular assumption about the passover effect is that the sticky wages and stickiness of the wage elasticity is smaller in short run and therefore the impact on employment is larger in short run as well. However, over longer period the carryover effect have a larger impact and this in turn would increase the unemployment in a society. In terms of wage elasticity, Sweden is less price sensitive compared to other countries and where the overall wage elasticity have over recent years been increasing and this have been due to that the world has become much smaller and more globalized (Sjödin, Bergman and Boman 2012).
The wage elasticity may vary in different parts of a country. This may be due to that the different areas of the labour market vary in terms of price sensitivity. One reason to this is that the education background is a factor that affects the wage elasticity. The carryover effect may also occur when firm does cost saving, where instead of using the labour cost subsides which is given by the government to its intended purpose the firm may keep the subsidized labour cost within the firm.
Therefore if the firm retains the subsidized labour cost within the firm it will be retained as increased profits for the firm. In this case the employment level would not be higher neither would the wages, this would instead mean that there would be an exchange in income from government to the firms and this is due to subsidizing labour cost. Firms are not able to gain or even take out higher profits if the market in which the firm is operating in is intense and have many actors.
Would a firm take out major profits from its operation it would lead to imbalance for the firm and this may directly affect the firm pricing on its initial product and this may lead to that the firm may have to exit the market. This is because the competitors charges a lower price. Firms have greater opportunities to pass over the subsidies to a higher profit and this in turn makes the employment effect lower if the there are few actors operating in the market (Sjödin, Bergman and Boman 2012).
27 4.3 Long run effect of labour and capital for a firm
In the long run, firms can change both of the inputs in the production. A price change in one of the firms’ inputs may help the firm in terms of improved quantity changes in the other input. A decrease in the labour cost for firms will increase the overall demand for labour in the market. The long run demand increase for labour is made up of two important factor effects. Firstly a lower labour cost would lead to a lower marginal cost for producing one output for the firm and this would change a firm’s optimal quantity. When the firm’s quantity increases it will have a direct effect on the firms since the firms demand on labour and capital increases. Thus a low labour cost would lead to an increase in a firm’s production. However the inputs used in the production for producing one unit of output would be constant. In this case, there is a scale effect. The second long term effect of lowering the labour cost is that the price on the labour in the market decreases.
If labour becomes cheaper, firms would at this point rather replace its capital with the labour.
Hence, more firms want labour and the overall demand for labour increases. This makes capital more unattractive and lowers the demand for capital. This also creates a substitution effect which reinforces the scale effect and makes the overall impact on labour force demand even greater in a market. How large the impact would be of a substitution effect would depend on firms internal factors such as labour and capital and to what pace the both can replace each other (Sjödin, Bergman and Boman 2012).
If firms are granted a capital incentive in form of lower capital cost then this may lead both to scale and substitution effects. A scale effect may occur because the firms’ marginal cost of producing one unit of output decreases, this in turn increases the firms’ production because the firm produces more at a lower cost that is either similar or lower than the market price. This will in turn make the demand for labour and capital more attractive for firms and will have made capital cheaper in comparison to labour. Because of this change the firm would rather now employ more capital and at the same time have less labour and makes the capital more attractive for firms. The substitution effect leads to that the firm want to have cheaper capital and does not want labour. The long run the effect on how large or small labour will be depend on which of the two effects, substitution effect or scale effect which is greater (Sjödin, Bergman and Boman 2012).
When looking at the labour force and labour market, there may exist a matching problem when there are both high unemployment and many jobs available at the same time in the market. This may occur when the unemployed have different level of education or no education that the vacant positions demand in the market. Another reason why this matching problem occurs may be due to geographical differences, where the unemployed labour force may be living too far away from the firms that have the open vacancies which may be in another part of the country or region. However, there is a greater chance of a labour market miss match, when employers demand on workers education increases. This is partially due to that the amount of professional jobs may have increased in the market. In addition to this, arguments have been that firms in the market are not utilizing the existing labour force competence enough and this leads to a greater miss match. The educated may have harder time in finding qualified jobs which suits their education level, while the labour force that are not educated are not offered any work since they are underqualified. The labour force demand may also rise when there is new entry in a market among firms. If for instance, firms in a less competitive market are making large profits, then this type of market will attract new entry of new firms which will take a share of the profits made by other firms. Due to the inflow of firms, the existing market dynamic may change and the market becomes more intense at this point the supply of goods will increase and the price would decrease at the same time. This
28 would occur until the market cannot offer any more profits and where the demand is equal to the supply and entry into the market would stop. The effect would be that the total demand for the labour force would increase and more firms have more labour (Sjödin, Bergman and Boman 2012).
4.4 The effect of starting a business
The wage level in a certain industry will have an effect on the individuals who wants to open their own business. This is because it all depends on the opportunity cost. This is because the individual losses the opportunity of receiving a monthly salary by working for a firm. This would mean that the individual would give up the security of having a stable wage every month. For a person who want to start its own business it would mean that in the beginning of the new enterprise, the owners would probably have a lower and a more uncertain wage level. Factors such as insecurity and the wage levels are important determinants when an individual chooses to start its own business.
However, the wage and other income opportunities from starting an own entrepreneurial business are highly dependent on the taxes that are reformed in a country or a region. A study have been made in Sweden regarding starting an own business and it has shown that a change in the overall business taxes leads to a change in the entrepreneurial behavior. The results regarding lower taxes have had a positive effect on the overall entrepreneurial activity and start-ups (Sjödin, Bergman and Boman 2012).
