Self-employment: not just for the downturn

16 April 2014 - Nida Broughton

Today’s ONS figures show the self-employed account for just under 15% of total employment, the highest it has been in two decades. The numbers in self-employment have grown by over 7% in year, compared to growth of just 1.6% in the number of employees.

Is this a good thing or not? One the one hand, it is at least contributing to keeping the unemployment rate down. Some work is better than no work. On the other hand, a Resolution Foundation report out today found that 28% of those who became self-employed in the last five years would rather be working for someone else. So part of the sharp rise in self-employment has come about as a result of the downturn: those who could not find employment went into self-employment instead.

Of course that’s not the full story. Many of those who are self-employed are satisfied with their current situation, and are not involved in it due to lack of available opportunities. Despite often working longer hours for less money, those who are self-employed by choice are happier: they report higher levels of life satisfaction. Many appreciate the flexibility that self-employment affords, as well as the opportunity to exercise greater independence and autonomy.

And the rise in self-employment is not just a phenomenon arising from the downturn. Self-employment as a proportion of total employment has been increasing for the past decade. A similar pattern emerges from the data on changes in businesses. The chart below, taken from BIS’s Business Population Estimates, shows the change in the number of UK private sector businesses, sorted by size. We have seen huge growth in the number of businesses since 2000, but almost all the growth is in businesses with no employees, which increased by 56% from 2000 to 2013. And the trend started to take off well before the recession.

Nida_Blog_Image_Self_Employment.png


This structural trend has two implications for policy. Firstly, what we must not assume is that the rise in self-employment is evidence of some new entrepreneurial revolution that will power future economic growth. Most self-employed individuals will not go off and set up high growth companies. And many of our new small companies will stay small. This is a vital point for entrepreneurship and small business policy: the SMF is currently undertaking research on what type of entrepreneurship is likely to bring the largest benefits to economic growth, and how we can encourage more of it. We will report on our findings and recommendations later in the year.

But secondly, we need to take better account of the self-employed in wider policy decisions relating to social policy and labour markets. Many policies designed to work through employers do not touch the growing number of self-employed. The minimum wage is one example. Auto-enrolment into pension schemes is another. It is often argued that some policies – rises in the minimum wage is one – risks pushing people into unemployment as firms decide to take on less staff. These days, this effect may manifest itself in a rise in self-employment instead. We are in danger of creating a two-track labour market, with highly protected employees on one track, and a growing number of self-employed with much less support on the other.

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