Inequality, social mobility and entrepreneurship

The ‘business start ups will save us’ meme is one that just refuses to die. Last week, former M&S boss Stuart Rose proclaimed an “entrepreneurial rush” based on the record number of companies being formed. Conservative chairman Grant Shapps said that entrepreneurialism is the key to social mobility. At least, that’s the way it’s being reported, though the piece itself is something of a ramble.

Let’s recap on what we know about self-employment.

1. Self employed people don’t earn as much as those in employment.

blanchflowergraph

Source: David Blanchflower, based on HMRC data.

2. 40 percent of self-employed people are in the bottom 20 percent of earners.

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Source: Institute for Fiscal Studies

3. Over the past decade, self-employed incomes have fallen more than those of the wider population

Screen Shot 2013-02-14 at 09.34.00

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Source: Office for National Statistics

4. Most of the new businesses set up over the last decade are one-man bands

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Source: New Policy Institute

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Source: Department for Business, Innovation & Skills

While there has been an increase in the number of people who are self-employed there has been a reduction in the number of employees who work for the self-employed. Between 2008 and 2012 there were 66,000 fewer people who were self-employed and had employees working for them, with a 431,000 increase in people who were self-employed and worked solely on their own or with a partner but specify they have no employees. – Office for National Statistics, February 2013.

5. Worldwide, high levels of self-employment are associated with low per capita GDP and poorly performing economies.

Self employed by country

Source: Gapminder, from data provided by the International Labour Organization

In general, self-employment rates are highest in countries with low per capita income although Italy, with a self-employment rate of around 25.5%, is an exception. – OECD

Self employment rates as a percentage of total employment

SelfEmployment

Source: OECD Factbook

6. Self-employment increases inequality levels in most major economies

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Source: Why Inequality Keeps Rising, OECD

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Source: Entrepreneurship at a Glance 2013, OECD

7. Rising self-employment is cited as a major reason for Britain’s increase in inequality

About one-half of the increase in individual earnings inequality is explained by changes in self-employment income as on the whole the self-employed earn less than full-time workers. Their share in total earnings increased by one fifth since the mid-1980s and among the self- employed, the gap between high and low earners has risen. – OECD, Why Inequality Keeps Rising, UK Country Note

Self-employment income plays a much more important role in the UK. The contribution of self-employment to the increase in inequality between 1979 and 2004 was of 0.065, i.e. half of the total increase…… The large contribution of self-employment to rising inequality is due to the sharp rise of the share of self-employment in total household income. – Source: Cecilia Garcia-Peñalosa and Elsa Orgiazzi, Factor Components of Inequality: A Cross-Country Study, Aix Marseille School of Economics (France) March 2013

8. The UK has seen one of the highest increases in self-employment among the major economies

Screen Shot 2013-12-30 at 11.01.25

Source: Entrepreneurship at a Glance 2013, OECD

Of course, social mobility is a difficult thing to measure and it’s hard to decide whether it’s getting better or worse. From this data, though, it looks very unlikely that entrepreneurship is going to make much of a difference. Starting a business might help a few people “escape the circumstances of their birth” but they will be the lucky ones. For most people, self-employment means lower earnings and even less security. High levels of self-employment are associated with higher levels of inequality and lower per capita GDP. There is a strong relationship between self-employment and basket-caseness.

Britain’s level of self-employment is high, relative to previous years and to other developed economies. A lot of people still seem to think this is a Good Thing. For the life of me, I can’t understand why.

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8 Responses to Inequality, social mobility and entrepreneurship

  1. Pingback: Inequality, social mobility and entrepreneurship - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. David says:

    The trouble with this analysis is that it views things in financial terms. The intangible costs of working for a modern organisation are massive and negate any financial advantage. As a self-employed person I have less money, but I am much better off. Vast swathes of time-wasting and soul destroying nonsense have been excised from my life.

  3. As you suggest, Shapp’s piece is incoherent (not to say delusional), at is isn’t clear whether he is talking about self-employment or SMEs that provide employment. Given that three-quarters of all UK businesses have zero employees, it is pretty clear that this “entrepreneurial rush” masks a lot of desperation at the lower end of the income scale (and institutionalised tax-avoidance at the top end).

    SMEs with employees tend to require working capital to start and grow, which immediately gives an advantage to the already wealthy or those with access to credit (i.e. possessing assets for collateral or having guarantors). The biggest boost to upward social mobility (i.e. from the working to middle class) in this country came in the 60s and 70s due to the expansion of the public sector and the growth of whitecollar jobs in the private sector, both of which were fed by the growth in further education. In other words, the facilitators of social mobility tend to be the state and large businesses, not SMEs or self-employment.

    The policies of the last 30 years have actually made the SME sector more ossified and less competitive, which explains the poor levels of investment and innovation in aggregate. Cuts in CGT and dividend tax, combined with property value (i.e. asset) inflation and low wages, have allowed many poorly-run firms to survive. We have too many lifestyle businesses, both in the sense of over-privileged “wealth generators” and disguised casual labour.

  4. This is all news to me. I made the most I’ve ever made last year, which was my first year of full self-employment as a WordPress developer.

    Not all self-employment is equal, but it stands to reason that the self-employed have a much greater chance of reaping the true value of their labors over traditional employment.

  5. octopushr says:

    Could you clarify something for me… In the income data from HMRC and the IFS what is the definition of being self-employed? Are directors of Ltd companies classified as self employed or employed?

    I’d have thought that a director who is paid a salary from a Ltd company that they own would still be classed as an employee. This would mean that the most successful segment of entrepreneurs in this data (i.e. those for whom it makes financial sense to operate as an employee of a Ltd company rather than as a sole trader or partnership) are excluded from the self-employed figures.

  6. guthrie says:

    This backs up what I have seen, as a long term unemployed person. There’s lots of poorly paid jobs where you are self employed, e.g. as a local parcel delivery driver, catalogue distributor, etc. Instead of being part of an organisation, you are a disposable unit who has the responsibility for their own NI payments, according to the adverts I see.

    Or in other words, becoming self employed works fine when you have a definite useful skill set that is in demand, but that has always been a minority of the workforce anyway. Everyone else is just being forced out of useful steady employment and into insecure badly paid work with no control over things.

  7. Metatone says:

    I’ve been the owner of a small business employing a handful of people, I’ve been a “work for self” and I’m currently partner in another small business.

    1) I’ve said it before, but I’ll say it again, please grind some of this into Adam Lent’s consciousness. He doesn’t seem able to absorb it.

    2) The great trick of business in Britain over the last 20 years has been to push people out of the organisation into contracting. It works well for some people, but even for them, the loss of security, particularly pension arrangements seems to skew it all to a bad deal in the long run…

    3) Property prices are huge drag on expanding from “work for self” or “v.small SME” to a larger state. Once you have people you need premises. Premises are overpriced in the economically active areas of the country. Other areas have cheap property, but then you spend more money in travel – and the challenges of attracting staff. UK internet provision is still quite a joke, so it isn’t fixing the geographical problems yet. Further issues, in some areas offices stand empty while owners wait for prices to go up. Being a landlord is subsidised… doesn’t help…

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