Don’t make the self-employed the punchbag of the next recession

Two months ago, few people had heard of Rishi Sunak. He is now about to go down in history as the most interventionist peacetime chancellor. His plan to pay 80 percent of the wages of employees kept on by their employers will help to mitigate the impact of the inevitable recession that will follow the shutdown of most business activity. But it has left a lot of people asking ‘what about the self-employed?’ They have been ‘hung out to dry’ says Paul Mason.

Self-employment passed the 5 million mark at the end of 2019 and now accounts for more that 15 percent of those in work. While the rise in self-employment has been celebrated by politicians and commentators as a success story and a sign of entrepreneurialism, there is a story less often told. A lot of the self-employed are skint. Or, if not totally skint, they are not earning very much.

The rise in self-employment hasn’t been matched by a rise in self-employment earnings. Most of the increase in the number of businesses in the UK since the start of this century has come from firms under the VAT threshold. The number of employing and registered businesses has increased roughly in line with the size of the workforce. The big rise in self-employment has seen a steady increase in the number of low turnover businesses.


 Source: Department for Business, Energy & Industrial Strategy, Business population estimates 2019

People often assume that the self-employed are minted because a few self-employed people earn a lot of money. However, most don’t. A report by the Institute for Fiscal Studies (IFS) last summer found that the mean annual self-employed income (£30,000) was just below the mean employed income (£31,000). However the median self-employed income was only £14,000 – much lower than the employee median of £22,700. The mean figure for the self-employed is skewed by a small number of very high earners at the top, usually working in partnerships.

Strip out the partnerships and the numbers look even worse. The figures for sole traders, who are around 85 percent of the self-employed, are even lower, with a mean income of £21,000 and a median of £13,000.

Sole trader incomes were particularly badly hit after the recession. Since 2008, the aggregate sole trader profit has fallen in real terms. That’s an astonishing fact. There are 800,000 more of them than there were in 2008 but they are making less in total than their counterparts did in 2008. I’m reminded of those nature programmes where, as the oasis dries up in a drought, more and more animals arrive to drink from the rapidly shrinking pool.

Consequently, the average real-terms profit for sole traders has fallen.

Chart source: Who are business owners and what are they doing?” – Institute for Fiscal Studies

As the IFS remarked:

These falls in profit are consequential: they represent falling living standards for individuals and households, and falling value added from the sole trader sector of the economy.

While the image of the rich, tax dodging self-employed businessman may persist, the majority of the self-employed are likely to be on lower incomes than those in employment. Many are people who were already struggling to get by.

The restrictions brought in to combat the coronavirus outbreak will hit them hard. Entitlement to the equivalent of statutory sick pay and the removal of the minimum income floor for Universal Credit will help. As the Resolution Foundation explained:

With this change, UC can essentially play the role of a means-tested unemployment benefit or an earnings-replacement benefit for the self-employed. This change will make a significant difference to some families’ incomes should work dry up for the self-employed.

While that might help the very lowest earners it will still leave many self-employed people dangerously exposed. According to the Telegraph the chancellor is “racing to plug “gaps” in his latest support package for businesses and workers, as he faces claims that he has “left behind” the self-employed.” This will be more difficult when dealing with people whose incomes are not assessed through PAYE and what emerges probably won’t be as generous as the support for the employed. Nevertheless, among the 5 million self-employed are a lot of people who are going to need help and it would be unfair to leave them out.

The incomes of the self-employed took a big hit after the financial crisis and have still not fully recovered. As I said a few years ago, they became the punchbag of the last recession. Let’s not make them the punchbag of the next one too.

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11 Responses to Don’t make the self-employed the punchbag of the next recession

  1. Prof Patricia Leighton says:

    Hi Rick. Good to have you back bringing rigor but also common sense to debates/policy development. You are so right about the ‘punchbag’-it took an enormous effort, which I had a small part in, to get them to ‘defer’ the outrageous IR 35 private sector changes(No data, no logic, an appalling CEST test and anomalies everywhere)..I am continuing to write myself on self-employed ‘bashing’, and for this government to be both ignorant and prejudiced is crazy)Just look at the success of the creative industries with a high % of self-employed-people willing to innovate, bear risk and focus on work, rather than millions paid in bonuses in financial services,
    I am a lawyer and work with HR people who have to implement government policies Thank you for pulling together some excellent information.
    Patricia

  2. P Hearn says:

    Does this assume all the self employed are working full time?

    Many of my acquaintance specifically went self employed to work reduced hours to suit their lifestyle choices or other family commitments. Clearly my point is entirely anecdotal, so interested to what extent lower earnings in this sector are a function of lower hours worked?

  3. Dipper says:

    well … lets split this into two parts.

    Firstly, the pandemic. We need to ensure that everyone has the money to eat and for essentials, and need to take steps to in effect freeze the economy in time through zero rates and pumping liquidity, and that should encompass everyone.

    But, if we are looking beyond the pandemic to a time when we can try and resume normal life, surely the point of the self-employed is they are risk takers and have higher highs and lower lows than permanent employees? otherwise they are just perms by another name, in which case they get treated like perms at all times? One of the major reasons for the success of the UK economy has been the ability to pick up and drop labour at short notice. If we lose that we run the risk of preventing our economy from expanding as fast as it otherwise might.

    • Blissex says:

      «surely the point of the self-employed is they are risk takers and have higher highs and lower lows than permanent employees?»

      That’s indeed the point, and any truly self-employed worker should (at a minimum) save 40-50% of their billings to cover unemployment and sickness risk, and pension costs. Otherwise they are “grasshoppers” who live large without provisioning for risk and then why should they be bailed out by taxpayer-“ants” when “winter” comes?

      «otherwise they are just perms by another name, in which case they get treated like perms at all times?»

      As blogger says, there are a lot of fake self-employed, where they are effectively employees who don’t get any job security or sickness pay or NI/pension contributions.

      A lot of them have been created by the DWP Job Centres, because their primary political mission is to reduce the unemployment statistics rather than unemployment, and the self-employed don’t count as unemployed.
      Another lot of them have been offered employment only if they agree to be fake self-employed, that is without jobs security, sickness pay, NI/pension contributions.

      In theory they are free adults and they could have refused to become fake self-employed, and just be unemployed, but that’s a completely different discussion.

  4. D. says:

    I’m not sure if this is quite relevant, but I’d like to share my own experiences.

    My wife is what’s nowadays called a “maker”. Technically self-employed.

    She spends most of the week making various painted things, which she then sells on Saturdays (and sometimes Sundays) at craft markets. That would be the craft markets which no longer exist.

    So, she has suddenly gone from earning an OK income (though well below the threshold for VAT or anything like that) to earning nothing at all. She’d thought, OK, well I can at least carry on making stuff ready for when Society opens up again.

    Except that she’s found herself made into an unpaid teacher instead – hand holding our two children through the school work that’s been thrown at us. She’s not very “IT-savvy” either, and one of our kids requires proper wrangling to get anything done.

    And all of this has been exaggerated by the fact that most of her friends are teachers or other public sector workers, who are continuing to get paid and grumbling about having to work from home (one of them said, “They expect me to upload a lesson plan video every day!” and another one of them said to her, “Ah, well, you can claim benefits”. Except that she isn’t looking for work, so how would she claim benefits?).

    • Blissex says:

      «My wife is what’s nowadays called a “maker”. Technically self-employed. She spends most of the week making various painted things, which she then sells on Saturdays (and sometimes Sundays) at craft markets.»

      That’s not quite being self-employed, that’s being a businessperson and running a business that employs herself too.

      «So, she has suddenly gone from earning an OK income […] to earning nothing at all.»

      Has she been saving 50% of her income to cover the risks of drops in sales, of sickness, the costs of a pension? Most businesspersons know that salary is only about 50% of the cost of employing someone. Did she realize that? Of course not. So a grasshopper facing winter, after a long summer.

      «one of our kids requires proper wrangling to get anything done.»

      Try to imagine then how easy it is for teachers to deal with that kid in class where there are another 25-30 kids, some of which also will require the same level of wrangling. Now that you have to do it yourself in optimal conditions I hope you realize that dumping your parenting problems on teachers is just too easy. So middle class.

      «another one of them said to her, “Ah, well, you can claim benefits”»

      Benefits are pretty much negligible, and even zero, especially if she has a working spouse and some savings.

      • D. says:

        Gosh, well, thank you for your sympathy; I’m glad we’re all in it together and nobody’s being smug.

        <>

        Or perhaps you don’t know what being the parent to a child with “not SEN enough” requirements is?

        <>

        No, she hasn’t. Her income – well below any tax thresholds – goes on living costs and costs of buying and producing the stuff she makes.

        Yes, I’m salaried, but my income also goes on bills, mortgage, and living costs. Neither of us have any savings: there’s almost no money left at the end of the month. The little we had saved up got blown recently on some necessary repairs to her van.

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