Is the rise in self-employment really a Good Thing?

This is a guest post from Steven Toft. Steven writes a popular blog, Flipchart Fairytales, in which he attempts to bust myths surrounding welfare and the world of work. You can find Steven's blog here, and follow him on Twitter here.

Government ministers like to talk about the jobs created on their watch, but over the last few years lots of people have been creating their own jobs. Three quarters of the increase in employment since 2008 has come from self-employment.

Source: ONS employment statistics

Some have hailed this as the sign of a new entrepreneurial spirit in Britain. It is these new businesses, they say, that will provide the economic growth for the coming decade.

But is this sharp rise in self-employment really a sign of dynamism in the economy?

Let’s look at the facts…

#1 Self-employed incomes are low

Many of the newly self-employed are not earning very much. A report by the Resolution Foundation found that the median annual earnings of the self-employed fell by 20 percent between 2006 and 2010, from £15,000 to an annual salary of £12,000. In other words, half the self-employed earn £12,000 a year or less, which is barely above the minimum wage.

Source: The State of Living Standards, Resolution Foundation

Research by the Institute for Fiscal Studies found that 40 percent of self-employed people are in the bottom 20 percent of earners and don’t even make the full-time minimum wage.

Source: Institute for Fiscal Studies

These figures show that the self-employed have earned less than the employed for the last three decades. The recession has just made the disparity that bit worse. Far from creating new wealth, the newly self-employed have simply been competing for a shrinking supply of work.

#2 Most of the new businesses are very small

According to the Department for Business, Innovation and Skills, businesses without employees account for most of the increase in the number of companies over the last decade or so.

This bears out the findings of a New Policy Institute study, which reviewed Labour Market Survey figures. It concluded that most of the increase in self-employment was due to people working for themselves.

Of course, some one-man bands grow into larger firms. However, the increase in the number of people setting up companies has been among those doing very small amounts of business. Most are below the £79,000 turnover threshold for VAT. While the total number of businesses has increased by over 40 percent, the number of employers and VAT registered businesses increased roughly in line with the size of the workforce. Whatever else is happening, the number of startups is not leading to an increase in the number of SMEs.

The increase in the number of low-turnover and low-paying businesses suggests that much of the rise in self-employment is due to the weak economy. People have started their own businesses as a way of avoiding unemployment. As CIPD economist John Philpott said, it is these Odd Jobbers who have been keeping the unemployment figures low. The rise in self-employment, then, is a symptom of a weakening economy.

#3 Countries with high self-employment rates tend to be poorer.

A high rate of self-employment is rarely the sign of a dynamic economy. High self-employment is generally a feature of poor countries. As the OECD commented:

In general, self-employment rates are highest in countries with low per capita income although Italy, with a self-employment rate of around 25.5%, is an exception.

Self-employment rates as a percentage of total employment

Source: OECD Factbook

The wealthier countries in the OECD have lower levels of self-employment. The USA, despite its image as the home of entrepreneurialism has one of the lowest. On just about any measure, America is not a small business country. Worldwide, there is a negative correlation between self-employment rates and per capita GDP.

Britain’s rapid rise in the rate of self-employment, the highest increase in the OECD, is making us look more like the low-productivity, low per-capita GDP countries of southern Europe.

Self-employment, then, is a feature of poorer countries. In general, it pays less than employment and half of the self-employed are close to the minimum wage. There is also nothing to suggest that lots of business start-ups will lead to the development of more viable businesses in the future.

Sure, most of the self-employed say they are happier than when they worked and, even allowing for some self-affirming bias, this is probably true. For the economy as a whole, though, there is little to celebrate about the rise in self-employment. It means lots of people on low pay, on in-work benefits and not paying very much in tax. Like zero-hours contracts and the rise in part-time work, increased self-employment is another symptom of an economy that can’t create enough well paid full-time jobs.

Having said that, the data also suggests that at least some of this increase is long-term. The number of small, non-employing businesses was increasing before the financial crisis. The economic downturn just gave the trend a boost.

As the economy and the labour market improve, it is likely that the number of self-employed workers will fall. The longer-term trend, though, indicates that the rate of self-employment will not go back to where it was before the recession. Having got into the habit of using freelance and contract labour, it looks likely that employers will continue do so, to a greater extent than they did in the past. Some of what the Resolution Foundation described as a “historic migration of employees into self-employment” may therefore turn out to be permanent.

The RSA and Etsy are exploring similar themes in a new project, The Power of Small.