UK self-employment: success story or basket case?

Some useful data on self-employed incomes appeared while I was out of the country. HMRC published its annual personal income statistics. Because of the time-lag in processing tax returns, this data is always nearly two years out of date, so it tells us what things looked like up to March 2013.

According to HMRC, there were 5.5 million people with self employment income in 2012-13 and, in total, they earned £80.6 billion. Compared with the pre-recession numbers, this shows a big rise in the number of people and a big drop in the amounts earned. In 2007-08 there were 4.9 million people with self-employment income and, in total, they earned £88.4 billion. So an extra 600,000 self-employed people earned around £8 billion less in 2012-13 than in 2007-08. And that’s before allowing for inflation.

The Resolution Foundation updated its all worker earnings estimate last month, which is the closest thing we’ve got to accurate data on self-employment earnings. (See previous post.) It shows the difference including the self-employed would make to the overall fall in earnings. Because self-employed incomes have fallen by so much, including them shows the pay squeeze to be even more severe than the official figures suggest.

At the end of last month, the New Policy Institute published an analysis of turnover among UK businesses, using the BIS Business Population Estimates and HMRC data.

The paper uses the following definitions:

• Zero employees (both registered and unregistered businesses) employing no-one but the business owner(s)
• Small – between 1 and 49 employee(s)
• Medium –between 50 and 249 employees
• Large – between 250 and 499 employees
• Very large – 500 or more employees

This shows that, since 2000, the number of businesses with no employees (apart from the owners) increased their share private sector employment from 13 to 17 percent.

With an increasing share of employment, we might reasonably expect the no-employee firms’ share of turnover to have risen too but it didn’t. Not even a little bit. Over the same period, it stayed pretty much the same. Since the recession, the total turnover of no employee firms has fallen in real terms. For all the talk of the rise of SMEs, businesses of 500+ employees had a greater share of the market in 2014 than they had in 2002.

The result of this was that, with more people chasing less money, the turnover per worker for the no-employee businesses fell, slowly at first, then more sharply after the recession.

Turnover per worker for non-employing businesses fell from £76,000 per worker in 2003 (adjusted for CPI) to £70,000 per worker in 2009 and then to £53,000 per worker in 2014. The recession made a fall in revenues that had been going on since the early 2000s even worse.

In all three of these datasets, the definitions are different. HMRC definitions exclude some people who would describe themselves as self-employed in the Labour Force Survey (the usual source of self-employment numbers) or the Family Resources Survey. The BIS figures look at businesses rather than people and some people may run more than one. That’s why the numbers of self-employed vary slightly depending on the sources used.

Whatever definition we use, though, the lines in the graphs all go in the same direction. The number of people goes up and the amount of money they earn goes down.

The rise of self-employment has become a common headline in recent years but it’s only a rise when you look at the number of people. In terms of money, there has been no rise at all. Financially, the sector has shrunk.

Despite an increase in numbers, the self-employed haven’t managed to increase the total earnings of the sector or its share of turnover. This suggests that very few of the self-employed are growing their businesses. They are simply competing with each other for a shrinking pot.

This shouldn’t come as a surprise given what we know about small businesses. As Paul Nightingale and Alex Coad found, the typical British startup is one which, it it is still in business after 2 years, just puts another one out of business.

There are good historical reasons why “the entrepreneurial virtues of new businesses are often assumed rather than examined” (Holtz-Eakin, 2000: 284), but as the empirical evidence in the previous section has shown, recent research is more sober about the value of self-employment and entrepreneurship. It certainly is the case that a small number of start-ups has a positive impact on the economy, but most of the time, for most of the firms, and for most of the performance metrics, the economic impact of entrepreneurial firms is poor.

The firms are marginal because they lack the ambition or capability to grow or innovate, have high death rates, and are poorly captured in statistics or academic studies. They are undersized because they lack the minimum efficient scale needed to perform on par with incumbents in their sectors and industries. As a result, they are poor performance: they have low productivity and low levels of innovation, and generate churn rather than economic growth.

Or, at least, they did. Since the recession, though, the churn has slowed down. The ONS attributes much of the rise in self-employment not to more people starting businesses but to fewer people leaving. Those who might once have quit and gone back to employment or retired are, instead, hanging on, fighting with the new entrants and accepting lower returns. I’m reminded of one of those David Attenborough nature programmes where, as the drought gets worse, more and more animals appear, desperate to drink from a shrinking water hole.

The cheerleaders for self-employment paint a picture of a dynamic, energetic and innovative sector. Some even think it will be the future of work. The numbers tell us something different though. If we look at non-employing businesses as a sector, it’s a story of chronic over-staffing, falling revenues and declining productivity. In short, a bit of a basket case.