Yesterday’s rise in unemployment took the total to a seventeen year high but the 128,000 rise over the last quarter hides something just as significant. Over the same period, the number of employees fell by 252,000. Much of the difference between the two figures is due to a massive jump in the number of self-employed people. A further 166,000 people became self-employed over the last three months, an increase of 4 percent, taking the total to 4.14 million, the highest since records began.
Is this a good thing? Almost certainly not. Doubtless some commentator will hail this as a sign of a new entrepreneurial spirit but we all know that this is complete rot. It’s difficult to infer too much from these raw figures but the sharp rise in self-employment probably tells us something about the sort of jobs that are being lost, especially in the public sector. Many of these people will be former in-house professional and technical staff who have become self-employed interims or contractors. Some will be IR35s; working for a single employer, often the one they have just left.
And the sad truth is that, for a lot of these people, life will be less secure and nowhere near as well paid as their corporate roles were. Few will make the equivalent of their last annual salary in their first year. Those that last that long will be lucky to do so in their second or third years. In large organisations, a certain proportion of a person’s pay level is due to organisation-specific factors. In other words, their pay is enhanced by their ability to navigate the waters in that particular organisation. The longer they stay in one place, the more of their salary is likely to be a function of this capability. As soon as they leave, that capability becomes obsolete. Before cutting loose from your employer, it’s always worth asking the question, “What are you without your company’s brand?”
When you are Director of ImportantStuff at WellKnownBrand Plc, getting in to see people isn’t a problem. The kudos comes with the job and so do the rewards. When you are Managing Director of NoOnesHeardOfYou Ltd, it’s a lot more difficult. Building up your reputation takes some time. It will be a while before you can afford the big office and the Jag again.
For many people, self-employment comes as a psychological shock. The lack of routine, the constant search for work and the roller-coaster peaks and troughs are too much for them. The lack of a clear place in the world unnerves some people too. It’s easy to be confident when you are a director of WellKnownBrand Plc. When it’s just you on your own, the doubts set in, even among the most self-assured.
As David Blanchflower said, most people shouldn’t be self-employed:
The problem with self-employment is that failure rates are high and for most self-employed people, incomes are low. Indeed, many have negative incomes as they make a loss. So, unlike bankers, they do have pay for performance and, when things go wrong, they make losses. For many, a business failure is devastating, as they have pooled rather than diversified their assets. It often involves loss of business, job, savings, pension, home and sometimes even marriage. For most people, becoming self-employed is a bad idea.
On average, he says, the salaries are lower for the self-employed than for those in employment. For every highly paid IT consultant or £5k a day motivational speaker, there are hundreds of people scratching around trying to make a living.
The rise in the number of self-employed people therefore has implications for tax revenues. Many of these people will not deliver anywhere near the same amount of tax to the government that they did last year.
The recession of the 1980s also saw a sharp rise in self-employment, as people sank their redundancy pay into new businesses. At the time, I was a grubby student, helping out at my local Citizens’ Advice Bureau. I remember people coming in asking for advice on setting up businesses. The debt counsellor would put her head in her hands and cry, “Oh no, not another one!” for all too many of them ended up at her desk a year or so later.
I fear that something similar will happen for many of the newly self-employed. Sure some will thrive. The lucky few will do so immediately, others will do so after a few tough years. A lot more will just get by; a slightly better alternative to the dole but nothing like the lifestyle they have been used to. And, unfortunately, some will crash and burn, ending up at the CAB to sort their debts out, if their borough is still lucky enough to have one.
This sudden increase in the number of self-employed people is no cause for celebration. A few people will have a ball but most won’t. And it won’t do much for the Chancellor’s tax revenues either.
Update: More on this theme over at Incomes Data Services