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 Because of the time-lag in processing tax returns, this data is always nearly two years out of date, so it tells us what things looked like up to March 2013.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.

Screen Shot 2015-02-05 at 08.37.34

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.

Screen Shot 2015-02-05 at 08.53.05

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.

Screen Shot 2015-02-05 at 08.55.16The 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.

Screen Shot 2015-02-05 at 08.59.51Turnover 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.

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21 Responses to UK self-employment: success story or basket case?

  1. Jeffery Davies says:

    Hum im thinking whot about those who were talked into going down this road by the jcp telling you you can claim these benefits whilst being self employed but after their tax yr ends you get the tax man asking you got to pay back your benefits has one hasnt earned enough yep I wo der how many of these cases are out there after surving a year on very little they now get another kicking jeff

  2. Em² says:

    Reblogged this on Stuff-Em-Up the hill backwards and commented:
    However you examine these figures it isn’t a level playing field and outcomes are not always as ideal as many would presume. Interesting grill down into the stats. Personally I’m interested in the exercise of separating out employee churn data from the supposedly optimum of actual meaningful and well remunerated long term job creation.

  3. John says:

    These facts come as no surprise to me. The whole point to the self-employment move has simply been – as ever – to manipulate and massage unemployment statistics. The Conservative-led coalition government (aided and abetted by their Lib Dem stooges) has ensured that a very rich few have done very – very – nicely out of the current economic situation but – for the vast majority – this situation looks likely to continue on into the future under the present government arrangements. Self-employed freelancers are the future of work in the UK and USA.
    Last night, Andrew Neill asked on his programe “This Week” why it was that with an apparently thriving employment situation and the UK economy apparently forging ahead and the best in Europe, why was it that the Conservatives and Lib Dems were not at least 10 per cent ahead in opinion polls? These latest figures simply confirm what everyone knew: that the claimed economic “miracle” of Cameron, Osborne and Clegg is just a manipulated PR mirage.
    Whatever “spin” this current government is putting out, people know from their own objective experiences that things are just not as rosy as the coalition government maintain they are.

  4. jray says:

    While on the WP towards the end of the 2 year sentence self employment was brought up,it reminded me of a Timeshare sales pitch,recently the JCP+ sent me to a business mentor,nice lady,very slick and here was the pitch! If you go on the NEA (New Enterprise Allowance) you will receive £65 per week for 13 weeks then it will drop to £33 per week for the next 13,but during this time you can claim WTC of £58 per week as the NEA will not be included in any other benefit calculation,we will also arrange a small business loan through the Government backed programme if you keep the loan below £7500 it can be approved locally,the average loan is £2500 payable over 3 years,you must keep the Mentor informed over the first 6 Months. Mentor= WP Provider
    6 Months= They can claim a outcome payment. We/I did not have a business plan/Idea this did not seem important as this would be discussed at a later date,smells real fishy.

    • John says:

      jray: what you state above is very interesting and well-informed.
      Some of the initials you use I have to guess as to what they mean.
      I assume WP = Work Provider?
      WTC = Working Tax Credit?
      JCP = Job Centre Plus?
      Presumably, JCP+ = Job Centre Plus PLUS?
      One question that comes to my mind is in connection with the small business loan: is it interest-free or is interest charged against the loan? If it is, what is the APR (Annual Percentage Rate)? What happens if the business generates insufficient revenue and/or insufficient profit to pay back the loan? Would it be taken out of future benefit receipts?

      • jray says:

        6% very reasonable,but it was stated that repayments would fund further loans to new clients and fund the costs of admin,very slim,still seems like a desperate scheme to funnel money to the WP Providers.

        • John says:

          It also fits in well with the new consumerist ideology.
          People become indebted and therefore more easy to control.
          People with debts are much less likely to rebel and become radical, aren’t they?
          How can someone with mortgage commitments go on strike?
          How can someone with debt commitments spare the time to get involved in political activities?
          It is all just perfect for creating sheeple instead of people.
          Debt is even better than religion for keeping society under control.
          The beauty is: the people being controlled pay for it – you couldn’t make it up!!
          Except someone somewhere sometime did.

  5. Paul Smith says:

    The RSA keeps writing glowing articles about self employment stenuosly ignoring these stats. I know several ‘self employed’ people who don’t seem to have any work at all but don’t want to describe themselves as unemployed

    • John says:

      As a Life FRSA I am aware that not only the RSA but other institutions – such as The Economist – are painting a picture of a future global “freelance” work force which is self-employed.
      Examples are cited of on-line recruitment of freelancers to undertake agency work. Incidentally, we now see more and more NHS nurses and doctors going down the same route, do we not?
      Fiverr is another example where agencies get freelancers to work cheaply on-line for them.
      More and more the world of work is resembling insecure and low paid activity while a fortunate few enjoy an increasing share of the world’s wealth – probably the owners of agencies.
      It is almost as if the world is going back in time to a world that existed a 1,000 years ago.
      How did it go? “The rich man in his castle, the poor man at his gate…..”
      I turn 70 next week and I have finally retired.
      Thank goodness.
      I no longer wish to work in this “brave new world”!

  6. Patricia Leighton says:

    Freelance working is not all about income. Its about choice and flexibility and for many an escape from the grind of being an employee.. I also think we need to diaggregate the groups within self-employment. Aren’t some, eg It, engineering, accountants and others doing rather well? But money isn’t everything-I write as a freelancer myself,

    • John says:

      On a recent BBC Radio 4 programme, mention was made of a self-employed man in Manchester who set up his own business photographing important Mancunian celebrities.
      Ove the year he was in business for himself, his gross revenue income was about £250.00.
      I don’t think that kind of situation is at all good, whether micro-, meso- or macro-economically.
      These aren’t even Mcjobs; they are boloney jobs being “created” to massage statistics.
      No doubt, some owner of some “training” agency pockets sums after 6 months of this fiction.

  7. Simon Jones says:

    I agree broadly with Patricia. It’s also a classic example of something that may be micro-economically “good” being macro-economically “bad”.

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  10. Noni Mausa says:

    Often, self-employment turns out to be a route to spending down the last of your savings on equipment, supplies and training for a service other people can’t afford to purchase.

    And also, the services with the least cost of entry, like photography, pet care and grooming, babysitting and home cleaning, become glutted with entrants who drive down quality and prices. Since these services never paid a lot in the first place, the result is to make both the new entrants and the existing professionals worse off. Also, the number of people who can afford dog walkers and house cleaners is not increased by the lower cost of these services, so far as I have seen.

    Noni

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