A 4 percent increase in self-employment. Oh dear!

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

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10 Responses to A 4 percent increase in self-employment. Oh dear!

  1. I agree, it’s no cause for celebration. I took the decision to go self-employed ten years ago when I took redundancy (I, along with others, was put on a one month ‘review period’ but we all knew what that actually meant) from my last full-time place of work. It was, and remains, a constant struggle compared to the security of a full-time paid job. It does have its upsides of course, no commute and I get to see the family much more regularly – particularly appreciated as I have two young sons. However, in no single year have I earned as much as I was paid previously. I’m not afraid to admit that because the money side to me is first and foremost about being able to keep my, and the family’s, head above water, not about material gain. Also, I was tired of office politics and playing the corporate game. The psychological shock, the monthly ups and downs of my business fortunes i.e. the good months followed by a couple of bad ones, then maybe another good one and so on – it can become draining after a while. Time after time during those ten years I have had moments when I have despaired of how I would be able to carry on in a self-employed capacity, only for something to come along and give me hope again. That’s how many of us self-employed people roll – like a boat in a choppy sea, from side to side, up and down and occasionally dipping under the surface only to come up again in time to be saved from drowning. It’s challenging, that’s for sure!

  2. Julia Tybura says:

    Very well put Rick. As someone who has been running my own business for 13 years having taken the leap into self employment from a secure public sector director role, your comments resonate. The first year is usually pretty easy as you call in favours and you can get work with people that you’ve just left. As you say, it’s the next few years that are the hardest. Now in my 13th year, some of my old colleagues and clients have moved onwards and upwards – which is great as they have become a lot more influential. However, as an SME, and despite having influential clients and champions of our company, we are finding it difficult to compete with the requirement that public sector organisations have to bring in one of the ‘big 4’, rather than a boutique consultancy such as ours. What’s the answer?… go back to being a sole trader or go and join the big boys as an employee?… either way it’s going to be a tough few years ahead for everyone.

  3. Pingback: A 4 percent increase in self-employment. Oh dear! - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  4. Doug Shaw says:

    Super post Rick. Your point about being ‘Director of ImportantStuff at WellKnownBrand Plc’ and the door opening kudos that comes with it strikes a chord with me. When I left BT I underestimated how much tougher it would be to create engagement and dialogue, even with people who knew me well in my former life as ‘Director of ImportantStuff at WellKnownBrand Plc’. It takes time to build business.

    2009 for me was a huge success in the mistake making and learning department and it sucked in the income department. I was fortunate to have the financial backing of my former employer by way of some redundancy money. That allowed the experiment to continue. 2010 started pretty much as 2009 had ended. And I kept going and after sowing lots more seeds early in the year, as late summer arrived I finally began to get some momentum going. As the redundancy pot drained dry my first big project arrived.

    2010 finished well and 2011 has been a lot of useful fun. I draw around £3000 a month from the business and yes that is less than I was paid previously at BT. And each one of those 3,000 little pounds weighs twice as heavy, feels twice as satisfying as it did before. I have never regretted my decision to leave BT. In so many ways my life is richer and more valuable than before. For example, I know so many more bright, adventurous supportive and constructively critical people all of whom I’ve met since 2009. I have become more open to possibilities and experimentation and I’m able to help people with these skills I’m learning and developing.

    2012 is going to be a stunning year. Fact. I just haven’t figured out how yet 😉

  5. needs2cash says:

    Work not jobs is important. Work that adds value for paying customers instead of occupying a job for a pension. Relying on friends for a livelihood is only necessary if your work adds little or no value for customers.

    Such jobs are being eliminated one by one so we are no longer paying for the waste.

    It is good to read that some people understand this and are willing to take a risk to experience the joys of work to find and serve their own customers. Done well these and more customers reward you enough to take care of your family, community and yourself.

    Done badly and you had better quickly find some other work you enjoy for the good of paying customers.

    …or you could return to huddle of wage slaves until your job is eliminated.

  6. Some interesting comments already, which I’d like to add to.
    Two years ago I sat down and took a serious look at my career leading to some pretty bold decisions. I decided it was time, after 15 years as a recruitment consultant and the comfort of a well paid job, to go it alone. Like Doug it has been an interesting initiation into the self-employed world but thoroughly enjoyable and rewarding.
    I’m no Richard Branson but I am enjoying developing my business and also the flexibility of being in charge. It is challenging and stressful at times but I have to accept the ups and the downs.
    Things are still tough out there, but there are opportunities to be had and we owe it to ourselves to turn this into a time for action. It’s tempting to batten down the hatches and doing nothing in a hard economic climate but I don’t think it has to be that way.
    Like Doug I believe 2012 will be a great year – good luck to the merry band of self employed.

  7. Rick says:

    Thanks for the comments folks. Much of this strikes a chord. I made my final year’s corporate salary in my first year self-employed but I now realise that was beginner’s luck. As Julia says, you still have some of the capital from your old job when you first start out. Things have evened out a bit as I’ve learned to manage the ups and downs. I don’t get those 4am ‘oh shit’ moments as often as I used to. Now I’m in a partnership with two former colleagues it’s much less stressful too, though I’ve had to re-learn the disciplines of working in a firm with other people.

    Would I go back and get a proper job? No and, in any case, as one CFO said to me recently, “You’re probably unemployable now.” I think he meant it as a compliment!

    I don’t think it is for everyone though. I think people have a rosy view of what being self-employed is all about. They think they will be richer and/or have more leisure time. Neither of these is true, at least not in the early years. I fear a lot of these 166,000 people will be disappointed.

  8. Frances Coppola says:

    I have been self-employed now for a very long time, in two different industries. Sometimes I long for the illusion of security that comes with employment, so I wouldn’t have to worry about when I will be paid and where the work will come from….but for me security was always just an illusion. I am more secure now in my self-employment than I ever was in employment.

    I worked as an independent consultant in banking & IT for many years. Like most people doing that, work was either feast or famine: a 6 month project could be followed by 3-4 months, or more, of no work. At times I worked on an employed basis, because that’s how some jobs were structured – but it was still project work, and the job ended when the project did. There was little difference in practice between employment and self-employment: even the remuneration was not vastly different, really. I was constantly in the market for more work even when employed, because I knew the job was only secure as long as I was working on a project.

    Now I work as a freelance professional singer and teacher. In the early years there was not enough work, of course, and I had to draw significantly on savings. Now, nine years on, I am constantly busy and have a wide and diverse portfolio which weathered the 2008 recession without too many problems and so far is not suffering seriously in this downturn. The main problem is cashflow, which is a constant worry – and yes, I do have 4 am “oh shit” moments. And occasional days when I literally have no idea how I’m going to buy food, because the money simply hasn’t come in. And I am nowhere near as well off as I was when I worked in the City, but that’s because this work simply doesn’t pay as well.

    I agree self-employment isn’t for everyone. It takes a long time to build up a successful business, it is very hard work and you are never completely free of the worry about money. And above all you have to want to manage your own risks and control your own future. If you don’t want to do this – if you “just want a job” – self-employment is definitely not for you.

  9. Stephen says:

    I disagree that self-employment is a bad thing. I would like to see everyone self-employed and so escape the oppressive terms that the modern employment contains. I would like to see big corporations broken up and fragmented and for the same services and products to be provided by self-employed individuals / partnerships who have taken responsibility for their lives. I would like to see the end of limited liability where the directors steal from the shareholders, where the shareholders enjoy unearned income, limited liability, all with no tax penalties and where it is employed workers who pay for these excesses.

  10. Phrag says:

    I made the jump from secure public sector employment to self-employment nearly five years ago. I have loved every moment of being self-employed & being accountable only to myself (& my wife). I love the freedom & flexibility it offers (e.g. take the kids to school in the morning & then off to the gym). And I used to hate the fact that I HAD to be in the office everyday. But this life isn’t for everyone. Over the last twelve months I have had numerous meetings with managers facing redundancy who are thinking about “taking the plunge”. Very few seem to get there…

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