The incredible shrinking gig economy

The New Policy Institute has some interesting charts based on the government’s business population statistics, looking at the rise of businesses with no employees, .

Given what we know about the rise in self-employment, we would expect to see an increase in the number of no-employee businesses and that is what has happened over the last fifteen years.

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Despite this, though, the share of turnover accounted for by these businesses is actually less than it was in 2000. Their share of total employment has risen from 13 to 17 percent while their share of turnover has fallen.

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Turnover per worker has increased for the largest companies, fallen significantly for small firms and collapsed for microbusinesses. The number of non-employee businesses has increased by 74 percent, their total turnover is only up by 24 percent in real terms. That means a lot more businesses needing to be fed from a pot that hasn’t grown by very much.

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Again, this corroborates what we know from the analysis of ONS, DWP and HMRC figures about the drop in self-employed earnings. The number of self-employed might have increased but, relative to the size of the economy, the amount of business they have generated hasn’t. The numbers don’t look all that great for small businesses either, while medium-sized ones have just about held their own.

On average, according to the NPI research, businesses with no employees turn over £53,000 a year, which is well below the VAT threshold. As the BIS figures show, this is where most of the growth in the number of businesses has come from over the past 15 years.

Private sector businesses 2015

Source: BIS Business Population Estimates

What seems to have happened is that the usual churn of small and very small businesses has slowed down so the number of people who might normally have been expected to stop running businesses has fallen. As the NPI’s research earlier this year showed, people are staying self-employed for longer.

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At one time, a hairdresser or fast food outlet might have folded once there was one too many on the high street and its owner either gone back into employment or retired. Nowadays they tend to keep going. This acted as one of the shock-absorbers for the economic downturn. Whereas some countries saw their unemployment rate rise after the recession, the UK’s self-employed gritted their teeth, hung on for dear life in barely viable businesses and buoyed up the employment figures.

There was a heated argument between Frances Coppola and Tim Worstall last month about whether the gig economy would create much economic growth. These figures suggest that, when you consider how many more of them there are, one-man businesses in this country haven’t created all that much growth between them over the past decade-and-a-half. In terms of people employed, this may be the age of the gig economy but in terms of money, despite a huge increase in their number, Britain’s microbusinesses have a smaller share of the economy than they did fifteen years ago. In that sense, our gig economy hasn’t grown, it’s shrunk.

 

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18 Responses to The incredible shrinking gig economy

  1. The argument between Frances Coppola and Tim Worstall is about the sharing economy, which overlaps with the gig economy but the sharing economy which is distinct – and Frances is wrong. She implicitly admits that better use is made of existing assets. Her argument then is rather on the lines of “electric lighting was bad for growth because it put lamplighters etc. out of business”. A hotel room unoccupied because more people rent rooms can be put to another use – at the worst it frees valuable land.

    Going back to the gig economy, I think there is more than one gig economy: it depends on the sort of work you do – do a hair dresser, a software developer and a management consultant face the same problems?

    • Rick says:

      Graeme, the gig economy and sharing economy are essentially the same thing; euphemisms for a world in which lots of people scratch a living doing bits and pieces.

      As ever, skill levels and their scarcity mean some people will earn more and have more security than others. That said, though it’s difficult to get data, anecdotal evidence tells me that freelance hair dressers, software developers and management consultants have all taken a hit over the past few years.

      • I think we are using different definitions of these. I have never used Uber, but if someone works extra hours and makes extra trips then, by the definitions I am using that is not part of the sharing economy, but is part of the gig economy. If they procide a ride share on a trip they would have made anyway, then they are part of the sharing economy. On the other hand a freelance software developer hired to write a bit of software for a company’s internal use is part of the gig economy but not the sharing economy

      • anecdotal evidence tells me that freelance hair dressers, software developers and management consultants have all taken a hit over the past few years.

        Are you talking about about a period over which employees have also taken a hit? The effect of less money for everyone is different for employees vs the self-employed. Companies lay off employees, so some people take a 100% hit while others take no or a small hit (e.g. bonuses and commissions go down – a big hit in some jobs of course, but not most). The self-employed all make lower revenue, but everyone makes some. How bad this is depends on how high your fixed costs are.

    • fmcoppola says:

      Umm no, Graeme, my argument was the reverse. Recruiting a lot of new lamplighters because that way more gas lamps can be lit does not create as much economic growth as replacing gas lamps with more efficient electric lamps and freeing lamplighters to find more productive things to do. It creates employment, yes, and it uses existing (inefficient) assets more intensively. At the margin there might be a bit more productive output because there is a little more light, but it’s hardly going to set the world alight. And if the effect of more intensive use of gas lamps is that electric lamps are not introduced, or are introduced more gradually, then the result is a FALL in total factor productivity growth relative to the counterfactual.

      Really the “sharing” argument hangs on the idea that the only area of business which can become more efficient due to technological improvement is marketing. I’m afraid I find that rather sad.

      • Part of this is addressed by my reply to Rick above. For the rest, I made my point badly, so I will clarify. I was really thinking of your argument about people renting spare bedrooms instead of using hotel rooms.

        1) The owner of the spare bedroom is better off
        2) The person renting it is better off, as they presumably paid less (or preferred it for some reason – I am sure lower cost is the commonest reason)
        3) Some proportion of the money saved by using a spare bedroom instead of a hotel room will be spent. The sellers of the goods and services the saved money is spent on are also better off.
        4) The hotel (owner, employees, whoever) is worse off.

        Even at this point we have a probably net benefit.

        On top of that, if renting spare bedrooms becomes sufficiently common for hotels to reduce capacity, then it frees land and building for other productive use.

  2. Pingback: The incredible shrinking gig economy | Flip Chart Fairy Tales | sdbast

  3. Hmmm:

    “In terms of people employed, this may be the age of the gig economy but in terms of money, despite a huge increase in their number, Britain’s microbusinesses have a smaller share of the economy than they did fifteen years ago. In that sense, our gig economy hasn’t grown, it’s shrunk.”

    Is the turnover of Uber counted as the turnover of those one man no employee companies or as the turnover of Uber? Going to make quite a difference to the gig economy’s portion of the economy…..

    • Rick says:

      Tim, I don’t doubt that a few firms will make a lot of money from exploiting freelancers. In fact some already are.

    • fmcoppola says:

      No, Tim. Taxi drivers are already self-employed. If Uber simply replaces existing taxi services with a lower-cost alternative, then the gig proportion shrinks in value. Of course Uber’s lower cost might encourage people to make more taxi journeys, but that might be offset by the fall in cost. I suspect it’s very nearly a wash.

      • You’re not understanding my point. The post looks at the revenues flowing to the one man bands in order to measure the gig economy. But is Uber measured as being a series of one man bands or as a large corporation?

        Going to change the numbers, isn’t it?

    • I feel like there’s an important distinction to be made between “technically self-employed” people working for Uber (and Taskrabbit, etc); “conventionally self-employed” people running their own businesses; and “unemployed self-employed” people who are living on savings and don’t want to claim jobseekers. Is it known which of these are and aren’t covered in these stats?

      On a similar note, the NPI’s statistics on businesses with no employees could be counting shell entities which large businesses use to structure their operations (for tax reasons or otherwise). Each of these are registered with Companies House and produce their own financial statements etc, but often have no employees. I feel like the number of these could be a significant fraction of the number of “genuine” businesses. Do you know if these are stripped out?

  4. Dave Timoney says:

    Rick,

    It’s a pity you added that last paragraph, as it’s served to distract from the central point: the poor productivity growth of microbusinesses.

    Depending on your priors, you can see the growth of the sharing/gig economy as technology enabling a greater rate of exploitation of capital (cars, flats etc), or low wages and precarious employment driving workers to sweat their assets. But the key point is that it is auxiliary. Many people in the sharing economy are part-time, and may even be holding down full-time (if not well-paid) jobs with large firms. This makes them categorically different to the full-time self-employed, which I think was what Graeme was getting at.

    Microbusinesses (i.e. 0 to 9 full-time employees) have long been held up as central to the health of the economy: if we can enourage small businesses, all will be right with the world. But this ignores that they tend to have access to smaller amounts of capital, which means that aggregate productivity growth must be depressed if this sector grows relative to larger businesses. The health of the economy depends primarily on very large firms, not only because their productivity growth will have a major bearing on average earnings, but because they ultimately generate the income of small businesses through sub-contracting and recycled wages.

    The notable microbusiness exception is specialist contractors brought in to exploit the capital of larger businesses (e.g. IT contractors operating through personal services companies). Indeed, much of the relative growth in microbusiness turnover in the 80s/90s was due to skilled workers going freelance but retaining access to capital. Over the last 15 years this process ran out of steam, and even reversed to the extent that many expensive contractors were absorbed by consultancies (i.e. their labour was recategorised to very large firms).

    Consequently, we’re now seeing the rate of productivity growth in the microbusiness sector revert to what we would expect given the low levels of capital – i.e. more heavily biased towards hairdressers than production engineers or DBAs. The “happy time” of well-paid freelancing looks like a temporary phenomenon that coincided with the sweet-spot of UK oil, the IT revolution (1980-2000), stock market-driven M&A and globalisation-driven business reengineering. In other words, the stagnation of small business productivity, like the growth of “sharing”, is symptomatic of changes within the large business sector.

  5. David says:

    angels , pin , dance , head – jeez

  6. Chris says:

    Perhaps we underestimate the ingenuity of the self-employed. It’s in the interest of one-person businesses to pay as little tax as possible, and therefore to minimise turnover and (crucially) profit. Any analysis based on official figures falls prey to this ingenuity. Ever heard of the black economy?

  7. rogerh says:

    I am mostly of the view that the Gig is a measure of desperation. Sure, Uber may evolve into smarter cars and something better than overpriced black cabs who won’t venture Sarf after dark. But mostly it is borne out of desperation, we are becoming more like a poor dusty Middle Eastern nation, all desperately scratching a living or enjoying a job with this or that Ministry.

    We are storing up trouble, most of these folk will not be making enough for a pension or even a home of their own. Like the proverbial chicken, all this will come home to roost in about 25 years. If you think social costs are high now, just wait till 2040. Kick the can, that is the strategy.

  8. Chris Brown says:

    Could this be a rise in the black market economy? i.e. earnings not declared for tax reasons? Would tie in with the squeeze on wages and rise in taxes post the 2008 crisis. In this case the gig economy might be thriving/growing but less likely to report earnings for taxes than in the past.

    • Only a certain type of work lends itself to tax evasion: things that are commonly paid in cash. If this type of work as increased as a proportion of the total, then it could exaggerate the fall in earnings, although it could not create it.

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