An interesting thought from Ben Dellot at the RSA. If current trends continue, sometime before the end of this decade, the number of people working for themselves will be greater than the number working in the public sector. What, he asks, might the political implications of this be?
The first thing to say about this is that I would be extremely surprised if either of these trends continue
The OBR forecasts that, according to the government’s projected public spending cuts, 1.1 million public sector jobs will disappear by 2018. The trouble is, no-one actually believes that the Coalition (assuming it is still in power) will be able to deliver these cuts. The IFS doesn’t and, reading between the lines, neither does the OBR. Cutting at this rate, while continuing the ring-fence on health and education, would leave only around 3 percent of GDP for everything else. As a recent joint IFS and JRF report put it, 1.1 million cuts to the public sector workforce would mean a 40 percent fall in everything that isn’t health or education. Even George Osborne has tacitly admitted that public service cuts on this scale are unlikely, which is why he is talking about cutting welfare instead.
So much for the public sector workforce, what about the number of self-employed people?
According to the latest figures, the number of self-employed people has has reached another record high. It seems to be setting a new record every few months now. I’d be surprised if it can continue along this path for much longer though. The number of self-employed people might have increased but between them, they earn less than they did five years ago. There are half a million more people fishing in a much smaller pond. Consequently, their earnings have crashed.
Source: Resolution Foundation
According to the Resolution Foundation, the median self-employed salary is now £12,000 a year. In other words, half the self-employed earn £12,000 a year or less. That’s barely above the minimum wage. A report from the IFS last year estimated that 40 percent of the self-employed were at or below the minimum wage.
All of which suggests that the rise in self-employment is unsustainable. As long as the self-employed are competing with each other for a limited supply of work, which is what seems to have been happening over the past few years, there isn’t much capacity for an increase in numbers. As the economy picks up, more work will become available but so will the number of permanent jobs. At least some of the self-employed are likely to return to permanent employment.
One should always beware of making predictions, of course, but I would be surprised if the two lines on Ben’s graph cross over quite so soon, if at all.
Having said that, he is right that there has been a shift from public sector to self-employment and that at least some of this shift will outlast the recession. Over the next ten years, we will have more self-employed workers and fewer public sector workers than we have known in recent decades.
Will this labour market shift see a corresponding shift in political attitudes?
The most obvious conclusion is that we would see a more individualistic and less collectively minded electorate; anti-tax, anti-public spending and anti-welfare. As Ben says,
The last British Social Attitudes survey in 2012 showed that the self-employed were the least likely to support an increase in taxation and spending than any other labour market group – and by some margin.
Being self-employed certainly makes you more aware of tax. When you actually have to hand over the money, rather than just see it as a line on the payslip, even the most left-wing tend to have a ‘Bloody hell! How much?’ moment.
For all that, though, the sharp increase in the number of self-employed has changed the nature of the self-employed workforce. The number of skilled tradespeople, the classic white van man image of the self-employed, has actually fallen since the start of the recession. The ranks of the self-employed have been swelled by administrators, managers and those in personal services. At least some in those first two categories are people who have left the public sector and are contracting back to it. Their livelihood depends to an extent on continued public spending.
I have no data for this (and couldn’t find any) but, given the level of their earnings, it would be astonishing if a significant number of self-employed people were not on housing benefit or tax credits. Assuming that the self-employed vote will be in favour of welfare cuts may, therefore, also be wide of the mark.
What, perhaps, is more likely is political pressure for self-employment to be recognised as normal. Punitive rates for mortgages and some forms of insurance are particular sources of grievance. So too is the clampdown on the use of contractors, particularly in the public sector. (Which stems from a government over-reaction to a tabloid non-story a couple of years ago.)
More self-employed people and fewer public sector workers may change our political landscape to an extent but the rapid changes in the nature of self-employment may have blurred the lines between self-employed and public sector workers and between the self-employed and benefit claimants. Both these factors will affect the political views of the self-employed. Time was when the Conservatives could rely on the votes of the self-employed. That may not be so any more.
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Good piece as usual here Rick. Much better than Ben’s stereotype mongering.
Particularly acute of you to pick up on the realities of how various commercial institutions (e.g. banks, insurance) have been able to assume in the past that “self-employed” was a minor category and pick on them. I’d not that there’s a parallel issue building around the tax system. Large corporations get around many rules that HMRC enforces on smaller businesses. I don’t think that’s sustainable in this envisaged future.
“In other words, half the self-employed earn £12,000 a year or less. ”
I think there’s an aspect to self employment you are missing. If someone earns £50K as an employee then becomes a contractor earning the same, they can set up a company with their partner/mum as a co-director and split the earnings between them, with the partner “doing the admin”. It makes sense then to divide the pay and also pay in dividends to reduce the overall tax liability. This will look like two people earning very little, but is really just one person earning what they used to. Net statistical effect is increase in employment with more low-paid self employed people. But that isn’t what is really happening.
Many people in low paid work – especially low paid self-employment, which can be at less than minimum wage, have very little incentive to increase their earnings.
Take the example of single parent with two children paying £150 per week rent and £20 council tax. A typical out-of-work claimant in this position would receive full council tax support and housing benefit, and an additional £220.34 per week in benefits to cover all other living expenses.
If this claimant were self employed and earning £100.00 per week for 16 hours work, net steady state income would rise to £300.23 per week after rent and council tax are paid, a modest but reasonable work incentive. Earning £200 per week for 32 hours would produce a net income of £311.48 after rent and council tax. On earning £300 for 48 hours the claimant’s net income would be £320.93. There just isn’t much of an incentive to take on additional work (or, if you are cynical, to declare additional earnings). (Note that the obfuscatory dynamics of the tax credits system mean that depending upon past employment history and income, actual entitlements immediately following taking up work may initially be quite different – the above figures represent a steady state scenario).
Under universal credit the equivalent weekly figures would be £ 0=> £220.69, £100=>£280.25, £200=>306.68, £300=>£330.48, which could be seen as a slight improvement
None of the above figures take into account childcare or the other costs of working.
Both Dipper and Tim Blackwell are bang on the money with their observations here.
The common denominator is that the tax system actively dis-incentivises work, or rather work beyond a fairly low level, since the work:reward ratio is too poor to make the opportunity cost of leisure time or welfare benefits too high.
One assumption of the blog seems to be that most of those who are self-employed are necessarily seeking to maximise their income, and are suffering a decline in income compared to previous employment only because they clean windows for £2 per hour where once they used to be in higher paid positions. Ignoring the not inconsiderable effect of income shifting (per Dipper), is this too simplistic?
Whilst certainly that will be true in some cases, there are people for whom self employment represents a way to manage their lives in a fashion other than the normal 9 to 5. Some will definitely run for a safe, corporate job as soon as things look up economically, and that’s fine because we need drones to fill a lot of those jobs. However, many very skilled people have discovered that there’s more to life than work, especially work for someone else.
I have several talented friends who work this way. None of them wants to make “too much money” because they perceive it will be taxed away, and also because they value leisure very highly. One, an Ofsted inspector, picks up several hundred pounds a day when working, but limits her work to a maximum of one inspection a month (taking approximately a week). She clearly could do four a month, (and Ofsted would like her to), but she sees no point in it.
Another, an artist, does computer animations which typically take up to a month to complete, earning him a small fortune each time. He then takes two to three months off to live on the proceeds. Yet another became a sculptor after being a computer programmer for 20 years, and now she bums around in a camper van for half the year with her partner, touring Europe. She’s 52, so not some daft adolescent, and just wants to do what she wants, when she wants, rather than being on the clock working in an office all day.
Fools like me slog away 6 days a week, actively trying to maximise my income and assets for my family. I realise I’m in a tiny minority, and frankly it’s foolish, since the wealth I’ve created will be taxed away at every turn, but the alternatives are not to bother and just melt back into the middle, or to move overseas. Something has to be wrong with that system, surely?
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