Self-employment is on the rise, now accounting for more than 1 in 7 workers in the UK.
Technological and regulatory changes have reduced the cost and increased the ease of becoming self-employed. In many ways, this is a positive story of increased flexibility and greater economic dynamism.
But there are also reasons to worry. Our research finds that low-paid self-employment is rising. Around half (49%) of the UK’s self-employed are in low pay, measured on an hourly basis, compared with around a fifth of employees (22%). Whilst the proportion of self-employed workers in low pay has been growing, in comparison, the proportion of employees in low pay has remained relatively stable.
There is an increasingly sharp divide between low paid workers who are employees and low-paid workers who are self-employed. The National Living Wage (NLW) is being brought in to boost the pay of low-paid workers. But according to our estimates, 1.73 million workers will continue to be paid below the NLW when it comes into force in April 2016 because it does not cover the self-employed. These 1.73 million workers are missing from the Government’s strategy to move from “a low wage, high tax, high welfare economy” to a “higher wage, lower tax, lower welfare economy”.
Effectively, with the National Living Wage acting as a floor for employees, there is a risk that low pay continues to exist, but largely invisible, through self-employment. Further, the self-employed are not entitled to same rights as employees, such as holiday and sick pay. There are different tax implications: elements of National Insurance do not apply to the self-employed. This means that this is not simply an issue of an excluded group living in greater relatively poverty. The divide in the way in which Government treats employees and the self-employed is making it artificially cheaper for firms to move to a model of firm-contractor, and away from the employer-employee model of working. This accelerates changes that are already underway due to technological advances. Over time, policy designed for a world of employee-employer relationships is likely to become less and less effective.
The low-paid self-employed have few other sources of income to rely on aside from their earnings. We looked at both personal income, and wider household income of low-paid workers. We find that across the UK, 64% of low-paid self-employed have no other sources of personal income aside from their employment earnings, compared to 36% of low-paid employees. Employees are much more likely to have at least some sources of non-employment income to supplement their employment earnings.
Further, the low-paid self-employed are more likely to live in low income households than their employee counterparts. Around 28% of the low-paid self-employed are also in low income households – or around 600,000 people across the UK. By comparison, 19% of low-paid employees are in low income households.
Nowhere is the prominence of self-employment greater than in London, where 18% of those in work are self-employed. Our figures for London only go as far as 2010-11, due to relatively long lags in the release of official data. We estimate that in 2010-11, 319,000 self-employed Londoners were in low monthly pay. This is equivalent to 52% of London’s self-employed. If London has followed the UK-wide trend over the past few years, it is likely that this figure will have since risen, to around 55%.
London’s self-employed are likely to face particular challenges, due to London’s relatively high cost of living. Volatility in self-employment earnings are likely make these high costs especially difficult to deal with. The Living Wage Foundation publishes a basic hourly rate intended to reflect the cost of living in UK and London specifically, based on calculations by the Centre for Research in Social Policy at Loughborough University and the Greater London Authority. According to our estimates, in 2010-11, around 67% of self-employed Londoners earned less than the equivalent of a full-time employee on the London Living Wage, at the time £15,100 a year.
We also find that London’s low-paid self-employed are less likely to have other sources of personal income aside from their employment earnings, compared to their UK-wide counterparts. 77% of London’s low-paid self-employed have no other sources of personal income aside from their employment earnings, compared to 64% UK-wide. This appears to be at least partly because the low-paid self-employed in London are younger and less likely to receive investment dividends and pension income.
Five sectors account for 73% of London’s low paid self-employed, and 64% of the UK’s self-employed. They are:
- Construction, which includes building site work, electricals and plumbing, decoration and roofing.
- Administrative and support activities, which includes a range of different types of activities, but our analysis shows that that the most common sub-component for the low-paid self-employed is services to buildings & landscape activities, such as cleaning and gardening.
- Transport & storage, of which the most important for the low-paid self-employed are “land transport”, most likely taxi, lorry or coach drivers.
- Professional, scientific and technical, where much of the low-paid self-employed are concentrated in design, photography and translation services.
- Wholesale and retail trade, with the majority of low-paid self-employed in retail trade.
In this paper, we set out our key findings from quantitative analysis of low paid self-employment across the UK and London in particular. This is the first stage of a wider project examining what should be done to support the low-paid self-employed. We pay particular attention to London, because of the specific challenges it faces: high costs of living and higher growth in self-employment than other regions of the UK.
The research so far raises a number of questions to explore, including:
- why the low-paid self-employed are highly concentrated within some sectors, and whether firms contracting with the self-employed should be doing more;
- the role of training and support to move into higher paid work. Much support for the self-employed often focuses on business growth, but most of the low-paid are in highly competitive areas of work, where growth prospects are likely to be limited;
- how the welfare system supports those in low-paid self-employment, particularly those who are there for long periods of time;
- the role of campaigns and information, such as the achievements that the Living Wage Foundation has brought about for employees;
- how Government will need to change its approach to tackling low pay, as policies built on the traditional idea of employer-employee relationships become less effective in reaching low paid workers over time.
In our follow up work, we plan to examine these questions in greater detail, looking at the likelihood of escaping from low paid self-employment and who manages to escape. We will use insights from interviews with the low-paid self-employed and existing models of support to explore how the low-paid self-employed can be helped into higher pay, and what the respective roles are for national Government, local government, LEPs, charities and businesses.