The migration to self-employment may outlast the recession

Yesterday, the Resolution Foundation published its report on living standards. Its most obvious theme is that the recession has made most of us worse off. However, it also shows that some of the features of the labour market which we associate with the downturn were underway before 2008 and were just given a boost by the economic crash. For example, the increase in self-employment over the last few years has been rapid but the percentage of self-employed workers has been increasing since well before the recession.

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There is also some evidence that self-employed pay rates were beginning to wobble before the recession too. (See last week’s post.)

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The report comments:

[P]erhaps the most overlooked feature of our new labour market is a transformation in the scale and nature of self-employment. Self-employment continued its long-term rise throughout 2013. In only five years since 2008 more than a third of a million (370,000) people have moved into self-employment and nearly 1 million (940,000) since 2000. This historic migration of employees into self-employment runs alongside a slump in the earnings of the self-employed. The median annual earnings of self-employed people fell 20 per cent in the last ten years, from £15,000 to £12,000. This data highlights a growing phenomenon of ‘odd jobs’, in which low pay is accentuated by the income insecurity of self-employment.

It’s becoming clear that, whatever we are seeing here, it’s not an increase in entrepreneurialism, if, by entrepreneurialism we mean setting up and growing a business. According the BIS figures, since 2000, the total number of businesses has increased by over 40 percent, while the number of employers and businesses registered for VAT has barely moved. An increase in the number of businesses has not fed through into an increase in the number of firms big enough to employ people or have turnover over £79,000.

Businesses 2000-13

Source: BIS Business Population Estimates 2013

This is consistent with the findings of the New Policy Institute. The number of self-employed people running the types of business that employ people and generate large revenues is pretty much the same as it was a decade ago.

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The last decade or so has seen a significant increase in the number of sole trading self-employed workers who don’t turn over enough to go above the £79,000 VAT threshold and certainly don’t enough business to employ anyone else.

Some of this is due to the weak economy. As John Philpott said, an army of odd jobbers is helping to keep the unemployment figures down. Along with zero hours contracts, low pay and a rise in part-time and temporary work, the increase in the number sole trading freelancers is a symptom of a under-employment. But might it also be an indicator of  something more long-term?

As these surprising trends in the UK jobs market have materialised, the question arises as to whether they are structural or cyclical. The recent rise in full-time work is reassuring, suggesting that one of the pressures behind underemployment may start to ease. But indicators of  job quality—the median pay of new jobs, and their temporary status—have proven more stubborn. 

Swathes of the UK economy depend on paying wages too low to sustain a family. In hotels and restaurants, two thirds (68 per cent) of workers are low paid. These figures help to explain the transformation that has occurred in the nature of poverty in Britain in the last two decades. This year for the first time the majority of people living in poverty in Britain are from working families.

The Resolution Foundation is pessimistic about wage growth over the next few years, even  with the forecast improvement in the economy.

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Is the fragmented, casualised labour market becoming entrenched? Having got used to using temporary as-and-when labour, or farming work out to self-employed contractors, will employers be reluctant to build up their permanent workforces, even as demand for their products starts to rise?

Probably, as the labour market improves, the number of self-employed workers will fall. But the longer term trend suggests that the rate of self-employment will not go back to where it was before the recession. It looks likely that employers will continue to use freelance and contract labour to a greater extent than they did in the past. Some of the “historic migration of employees into self-employment” may therefore turn out to be a permanent settlement. 

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7 Responses to The migration to self-employment may outlast the recession

  1. I wonder if the rise in low earnings self-employment has been partially driven (or at least facilitated) by the relatively easy availability of working tax credits (from 2003), especially given the increasingly draconian sanctions regime applied to jobseeker’s allowance claimants. Unlike universal credit, working tax credit does not have a minimum income floor (ie assumed minimum earnings that exempt a worker from in-work conditionality). It’s therefore possible to claim working tax credit (as a self-employed person) whilst reporting a very low income (and of course, some of the rise in self-employment will be a result of minimum wage avoidance).

    • Dipper says:

      The ability to work for your own company and split assets and pay between yourself as employee and your company, and the resulting opportunity for bureacratic arbitrage can come in quite handy, whether it be obtaining grants based on parental “income” or making claims about (lack of) wealth in divorce courts.

  2. Pingback: UK: Migration to self-employment | Peak Jobs

  3. Dipper says:

    interesting point about the rise in self-employment preceeding the crash. You reported recently on the drop in wealth of people in their thirties preceeding the crash. These factors indicate increasing financial strain prior to the crash and not primarily caused by the crash.

    I think this supports the theory that the banking crisis was the result of the pyramid scheme of property-based wealth in the USA and UK that had fuelled the preceeding decade-long boom coming to an end, and the reason it ended is because there was no-one left to lend to. As pyramid schemes need a stream of new entrants to fund the returns to existing members, it crashed.

  4. Is the change not simply due to the changes in the way Britian works, in that we are seeing the effects of the lack of permanent employment, uncertainy in job, and corporate desires to downsize and control workers? I.e. there’s been a massive shift in how the workforce is employed over the last decade and more, compared to how it was in the 80’s or 90’s?

    My owne experience has been since 2000, and it has always been made clear to me that I am disposable and cannot expect anything from my employers.

  5. Consumers can only spend what they earn. (Borrowing is merely postponed earnings.) While every company in our economy aims to reduce labour costs, they reduce the size of the market, reducing everyone’s revenues. Its a ‘tragedy of the commons’ problem.

    While companies should strive for efficiencies; the argument still stands; efficiency is incompatible with a world where people can only spend what they earn. Unless you invent other professions and the demand to fuel these professions, the system fails. The idea of inventing demand in this way is ludicrous anyway.

    Obviously the best resolution to this is that efficiency continues; while people receive money from shared ownership in society while they compete for extra income in the workspace.

    So we need the free market.
    We need a citizens’ allowance.
    And we need a level playing field in the private sector.

    In particular, international companies cannot have an advantage over local companies. So business rates must go. We need to resolve the tax avoidance situation brought about by transfer pricing through tax havens. We need to compensate for the advantages large companies have in terms of uncompetitive economies of scale they might have.

  6. Dom says:

    Hi,

    What are your thoughts on virtual staffing platforms as there has been a rapid increase both new platforms and people registering offering services?

    These are expected to grow at over 500% to over $5 billion dollars per year in transactions from $1 billion today.

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