More self-employment means …?

Our new Megatrends report documents the increase in self-employment seen in the UK. In the 1950s, just 6% of jobs were self-employed. Since then, as shown in the chart, self-employment has reached 13% of all jobs.

Self-employment seems to have undergone two ‘growth spurts’ – most dramatically, during the 1980s and early 1990s; and in the period from 2008 to 2014/15.

The first of these leads us to one explanation for the increase in self-employment. The 1980s were the decade associated with enterprise, deregulation, Howard’s Way and Only Fools and Horses. Rising self-employment then becomes a symbol of a search for independence and freedom from interference, something to be encouraged and applauded, even if not for everyone. Perhaps technology updates the story with the ability to launch a business from a phone lowering entry costs dramatically in some industries.

But the 1980s also offers a competing explanation for the rise in self-employment. It was also the decade when the Enterprise Allowance Scheme was introduced – a scheme to help unemployed people off the count and into their own business, a scheme since resurrected whenever there’s been a recession. Self-employment is seen in this light as a sign of labour market weakness, something people only pursue through lack of other options. In the 1980s, this led redundant steelworkers and miners to become window cleaners. More recently, a different demographic has gone freelance or joined the ‘gig economy’.

Tempting though single (and simple) explanations are, there’s probably something in both stories. For example, if self-employment is so bad, how come the self-employed have higher average levels of satisfaction with their job and with their life? But if self-employment is so good, why do the self-employed work longer hours than employees and earn less (apart from the most successful)?

Other statistics complicate the picture. The post-2008 increase in self-employment wasn’t due to a surge in numbers becoming self-employed, it was more the result of people staying self-employed (nearly one-fifth of the self-employed are over 60). If they were going to make a new series of Only Fools and Horses, the issue would be whether Del Boy would be willing or able to stop before the Grim Reaper intervened.

The Taylor Review and the joint report of the BEIS and DWP Select Committees have highlighted the issue of employment status (again) with particular reference to the ‘gig economy’. But is the ‘gig economy’ sizeable enough (yet) to justify this attention? In contrast, it is claimed, on the basis of research by academics, that there are as many as 400,000 ‘bogus self-employed’ people working in construction, where firms and (sometimes) individuals try and structure their relationships around the tax and National Insurance rules.

Most of the self-employed aren’t delivering pizzas (or people) to help pay off the mortgage, or freelancing at lucrative (and, no doubt, tax-efficient) rates. The most common occupations for self-employment are jobs like hairdressing and skilled trades (think plumbers and plasterers). And some of the self-employed labour out of sight. A ‘self-employed’ person doesn’t just deliver your burger. The spread of franchising means the restaurant owner may be self-employed (even if you order from a chain). Even the person taking your next Zumba class may be (willingly or unwillingly) one of this army of micro-entrepreneurs.

Is this growth in self-employment good for the economy? Many self-employed people earn less than they would do as an employee. Their productivity is probably less than a comparable employee (they undertake less training, so possibly eroding their expertise, never mind the hours they spend on the books, marketing and so on). If more of the workforce is self-employed, will this change in its composition hold back productivity growth? Of course, the self-employed may not mind as they may be happy to swap less income for freedom from the demands of employment (such as having to take orders). But does that choice affect others through its effect on productivity or tax revenues (recent HMRC-sponsored research suggests the self-employed are more likely to be involved with the hidden economy via ‘cash-in-hand’)?

But it’s important to have a sense of proportion. There are lots of possible reasons for our woeful productivity performance. The Office for Budget Responsibility have pointed to weak business investment. Yes, the self-employed may find it harder investing in their business, but that weakness will also be due to larger firms not spending. And while more self-employment adds uncertainty to forecasts of tax revenues, sole traders tend be unable to afford the advice necessary to be involved in industrial-scale tax-planning. Indeed, somebody self-employed is more likely to be claiming benefits than sending their money offshore. Having more self-employed wasn’t the solution to the UK’s productivity weakness in the 1980s; nor is it the cause of our productivity weakness in the current decade.

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  • I'm self-employed (business training) and I love it.  So that fits the polls. Talking to others, the improvement in life-style is so high that only financial pressure would drive us back.  So it's here to stay.  The nation needs to stop worrying about it and learn how to make the most of it.

    We need legislation to avoid exploitation, easy access to free/cheap training and small funding when we need it.  Most important - efficient routes to market.  

    In some ways it is productive to use people just exactly when you need them and share their skills with other businesses.

    Pamela Hunt