Self-employment is no easy route out of poverty

With wages continuing to rise, the outlook is positive for Britain’s workers. Overall employment, at 73%, is only just below the record high seen at the start of the year, according to the latest official statistics published today. However, we are now seeing a shift in where jobs are being created.

This time last year, there had been a dramatic rise in the numbers of self-employed. In contrast, the growth in jobs in recent months is predominantly due to the growing number of employees: whilst the job market has been getting better, self-employment growth has slowed, and is now slightly lower than the same time last year. As the jobs market has improved, it would appear that the attraction of self-employment has dimmed.

Of course, there many different types of self-employment, and people have all sorts of reasons for becoming self-employed. But it is hard to escape the conclusion that for a significant proportion of individuals, self-employment is a last resort, when other jobs are unavailable. A recent study by the RSA found that 42% of self-employed workers earn less than the equivalent of a full-time employee on the minimum wage. Even among those who have been self-employed for at least two years, the proportion is a quarter.

Some people will be self-employed out of choice – perhaps they are already financially well-off, and are making some money on the side. And, it might be argued, what is the problem with self-employment acting as a safety-valve when the jobs market gets difficult? Surely a job in self-employment is better than no job at all?

The problem is when the safety valve becomes a permanent one. The story of disadvantaged ethnic minority groups, set out in the SMF’s recent paper for the Joseph Rowntree Foundation is instructive. Analysis of census data shows that in the early 1990s, self-employment was much higher among ethnic minority groups than the white majority, with the exception of Black Caribbeans and Black Africans. At the time, this higher rate of self-employment was often seen as a success story of entrepreneurial spirit, pulling households out of poverty, and something to be encouraged among less “entrepreneurial” groups.

Yet in ethnic groups where people have increasingly been able to access professional, high skilled jobs – Indian and Chinese groups in particular – self-employment has been falling, even as it risen among the general population. First generation migrants often find it difficult to make the best use of their skills and qualifications in finding work. In such circumstances, self-employment can look relatively attractive. But the children of self-employed migrants in these groups had access to better employment opportunities; and increasingly turned away from self-employment. Working for themselves became a less appealing prospect. For these groups, the safety-valve of self-employment lasted perhaps a generation.

For others, disadvantage appears to be perpetuating down the generations, with no sign of the safety valve being released. Pakistani men have the highest rate of self-employment, much of which is low-paid and in areas with few opportunities to progress, such as taxi-driving. Those who do work as employees earn on average £2 less per hour than the white majority. With poor employment opportunities, it is unsurprising that self-employment is on the rise.

Here, self-employment is masking the scale of disadvantage that those from a Pakistani background face in accessing high quality jobs. Often, the tool that policymakers reach for when looking for ways to help the self-employed is support with business growth. That certainly has a part to play, but there will be many who are self-employed in sectors with few opportunities for business growth. For these people, the root causes of disadvantage need to be tackled: the focus has to be on widening employment opportunities. And whilst the problem is most obvious among the Pakistani group, there are likely to be many more for whom self-employment is a response to difficulties finding work as employees. For these people, self-employment is no easy route out of poverty.


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