Self-employment: going south

Adam Lent responded to my post about the shifting balance between freelancers and public employees, suggesting that I am in a panic about the rise in self-employment.

Let’s remind ourselves how all this started. As the self-employment figures began to rise, some people hailed it as the dawn of a new era of entrepreneurialism and self-reliance. Government ministers boasted about job creation. The higher the numbers went, the more hyperbolic their comments got. Then some of us said that, given what we know about self-employment, both here and in other countries, it might not be such a good thing after all. I’d say it was a word of caution to the cool-aid drinkers rather than a panic.

Adam makes a couple of interesting points about the correlation between high-levels of self-employment and low per capita GDP.

Screen Shot 2014-04-30 at 17.19.51

Over on the left are two very low self-employment and very high GDP per capita countries. The two countries are Norway and Luxembourg.

[T]hat group 1 are outliers. Neither Norway nor Luxembourg have conventional economies: the first is heavily dependent on oil and gas exports for its income and the second has a population the size of Manchester’s and is dominated by its banking sector. Neither of these can tell us much about the relationship between self-employment and economic health.

OK, they are outliers, but if you take them out, the trend line still goes the same way.

As as for the countries at the other end:

[T]he Mediterranean economies are in a bit of a mess. Self-employment levels may bear some relation to this but it is clearly far from the whole story. Go back a decade, for example, and Italy was actually out-performing the OECD average for GDP per capita even though its self-employment rate was higher.

True enough, Italy is also an outlier, as the OECD said:

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.

Or, at least, it was. Italy’s economic performance began to slide well before the global financial crisis. As early as 2005, some were suggesting its industrial structure left it ill-equipped to deal with the challenges of globalisation, and that prolonged stagnation might eventually force it out of the Euro. This Chatham House paper cites Italy’s disproportionate number of small firms as one of the major causes of its lack of competitiveness.

[M]any Italian firms are undercapitalized, often because of their size (Guerrieri and Esposito 2012) and are thus unable to invest on a regular basis, for example in R&D activities; in 2010 almost 40% of micro enterprises did not invest at all, according to the Bank of Italy (2013c). Data from the Bank of Italy (2013c) also show that the 30% differential in R&D investments between Italian and German firms is due to the much lower percentage of German SMEs in terms of the total. Moreover, globally competitive firms tend to be bigger and concentrated in specific sectors, while an excessive level of fragmentation among firms in other sectors prevents them from achieving a sufficient degree of competitiveness.

Articles in the Economist and Wall Street Journal have pointed to the sheer number of small businesses in southern Europe and their resulting low productivity. Matthew Yglesias said something similar during the Euro crisis. As LSE’s Stefan Bauchowitz said, self-employment is a symptom mistaken for a cure.

Where there are few employment possibilities people will have to become entrepreneurs – but these are subsistence entrepreneurs, which are quite distinct from the holy grail of transformational entrepreneurs found in the more dynamic economies.

Subsistence entrepreneurs engage in basic economic activity that rarely go beyond meeting the entrepreneur’s own needs. By contrast, transformational entrepreneurs tend to create larger enterprises, and provide employment opportunities for others. To be sure, there’s nothing wrong about subsistence entrepreneurs – they do contribute to a large part of economic activity in developing and transition economies. However, this type of entrepreneurship will not solve the Euro Crisis or “ignite the beginning of a new dynamism.”

Small firms don’t invest as much, per employee, as large ones. Therefore, the more people a country has working in small firms, the lower overall investment is likely to be. So, while self-employment grows to fill the space left by lack of investment, over time, it can also reinforce that lack of investment.

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Source: European Commission

And southern Europe has a lot of people employed in very small firms.

Screen Shot 2014-05-01 at 08.46.39

Source: Stefan Bauchowitz, LSE

While I was looking at stuff on southern Europe, I came across a piece written by Lisbon University professor Manuel Villaverde Cabral in 2000, about the rise of self-employment in Portugal.

Screen Shot 2014-05-01 at 08.29.50

 

All sounds vaguely familiar doesn’t it?

Adam is right that self-employment of 14 percent is not, in itself, cause for alarm. As he says, it only puts the UK at the upper end of the cluster of relatively affluent countries. However, the speed and scale of the increase, way more than anywhere else in the OECD, and the corresponding collapse in earnings, suggests that at least some of it is a symptom of southern European problems; low investment and under-employment.

 

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5 Responses to Self-employment: going south

  1. Tigger says:

    Another reason why workers may register as self-employed when they’re made redundant in the UK is that they then have to pay far less National Insurance to get a year’s “stamp” if they cannot find work, thereby topping up their entitlement to a full state pension far more cheaply than would otherwise be the case. This might be a sign of (especially older?) workers’ lower expectations of ever working again on a regular basis rather than any entrepreneurial spirit.

    I think one of the tax dodges offered to workers in some large banking/tech companies revolves around them registering as self-employed too, doesn’t it?

  2. bjg says:

    “Self-employment” is like “artisan”: a word that gives a gloss of middle-class respectability, in this case to what might otherwise be described as “casual labour”, as you pointed out https://flipchartfairytales.wordpress.com/2012/02/24/the-odd-job-society/. It would be interesting to know the age profile of the new casual labourers; how significant is what is suggested in this piece http://www.finfacts.ie/irishfinancenews/article_1027614.shtml about Swiss experience?

    Self-employment for older folk, zero-hours contracts and internships for the young ….

    bjg

  3. prateekbuch says:

    [Anecdote, and that too second hand anecdote, klaxon] India also has a productivity problem, and a massive long tail of micro-businesses. Although correlation does not equate to causation, it does suggest that micro-businesses face difficulties in investing and innovating which reduce productivity, adding a bit to the argument you’re making I think…

  4. Dave Timoney says:

    The correlation between business size and productivity is well-known: larger businesses have higher productivity on average, smaller business have lower. This is not in itself a problem, but it becomes an issue when the composition of the business population changes. Disproportionate growth among SMEs acts as a drag on national GDP growth.

    In addition to higher rates of investment and economies of scale, one driver for the difference between small and large businesses is the degree of employee churn. When staff move between firms they often transplant improved working practices (this may be the sole reason for their hiring). Employess of large firms tend to be more “promiscuous” in this regard, while among small firms the core skilled workers are more likely to be founders or bound by stronger social ties.

    If your “SME” is actually a sole trader, with an arms-length relationship to a larger business (e.g. as a sub-contractor), the potential for technology transfer (i.e. learning new techniques) is greatly reduced. In other words, a disproportionate growth in zero-employee businesses can act as a drag on aggregate human capital growth.

    According to BIS, zero-employee businesses increased by 56 per cent between 2000 (2.4 million) and 2013 (3.7 million), accounting for more than the total growth in business numbers (larger firms fell in number, offsetting this). Of that 1.3 million increase, 1.2 million are unregistered for VAT. In other words, they are indistinguishable from “casual labour”.

    See pgs 5 and 6 of … https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/254552/13-92-business-population-estimates-2013-stats-release-4.pdf

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