What’s happening to the earnings of the self-employed?

This week the ONS published a brief report on the rise in self-employment. The headline is that the number of people working for themselves has reached a record 4.6 million, the equivalent of 15 per cent of the workforce. This is the highest figure since records began 40 years ago.

Yet it wasn’t the aggregate numbers the media paid attention to. It was the stats on their earnings, which the ONS report had fallen by 22 per cent in real terms between 2008 and 2012 – quite a staggering fall. Others have highlighted a similar trend, including ourselves and the likes of the Resolution Foundation. In short, the message of the data is that while being your own boss may be more fulfilling, it can also be financially precarious.

While I broadly subscribe to this position, I do increasingly wonder whether we may be exaggerating the income crashes and shortfalls of the self-employed. Here are three reasons why:

The first concerns how the data is analysed and reported. One of the mistakes we often make is to lump part-timers with full-timers, which serves to bring down the average earnings figure. For example, the Resolution Foundation highlighted in its recent report that the self-employed earned 40 per cent less than the typical employed person, yet this (I believe) was based on data that included both part-timers and full-timers. Separate them out and what happens is that the wage differential between full-timers shrinks to 20 per cent (as per the graph below).

Moreover, one of the reasons why we may have seen a large fall in aggregate self-employed earnings since the recession is because most of the new joiners are part-timers. In fact, since the start of 2014 the number of people in part-time self-employment has increased by 100,000. That’s a 10 per cent growth in the space of little under a year, and is likely to have a noticeable impact on the earnings data (when it comes out).

The second caveat relates to how the self-employed report their earnings. Many suspect that those who work for themselves are undeclaring a hefty proportion of their income for tax purposes – what is effectively tax evasion. The tax expert and campaigner Richard Murphy thinks one pound in every ten of sales in the UK is not declared to the tax authorities, and that as much as half of this relates to self-employed business activity. Added to this is tax avoidance, where a company owner might pay him/herself a minimum wage and the rest of their earnings in dividends so as to duck tax obligations. The problem is that the data collected by HMRC and ONS will often not take into account these payment loopholes, meaning that the income of the self-employed is inaccurately reported as being lower than it really is.

The third and final caveat is that the income of the self-employed may simply be more volatile. In other words, they may see their income crash during the economic downturns but then increase quite sharply as soon as the economy returns to full health. Why should their income be more voltatile? Partly because the self-employed are more likely to try and retain their position and accept less hours and pay in a downturn compared to those working for someone else. Put another way, a business owner will likely swallow a £5-10k reduction in income to save his or her business, but a person working in a conventional job would probably walk away – and this in turn has a knock on effect on the earnings figures. Indeed, we know that during the recession underemployment within the self-employed community grew faster than among employees.

None of this of course is to say that the self-employed do not face financial challenges. They undoubtedly earn less than typical employees, and face several other challenges including limited access to sick pay, pensions and maternity/paternity pay. Indeed, these are issues we’ll be exploring in a new project with the Joseph Rowntree Foundation. But what is clear is that a closer look at the data reveals that life is not all financial doom and gloom for people who want to work for themselves.

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