Ed Balls can't ignore the growing ranks of people working for themselves. Photo: Getty
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Labour need to address the self-employment problem

Of all workers in the UK, over one in every seven is self-employed. Labour should account for this in its economic proposals.

In the early years of the coalition government, Labour had an easy argument to trot out. The route to economic recovery was painfully slow, and all the talk was of double dips and possible triple dips. When the recovery (and some happy revisions to the economic statistics) finally happened, Labour had to start talking about living standards instead. This was a risky strategy – there was a fair chance that the cost of living problem could have evaporated by now.

Unluckily for the rest for us, but luckily for Labour strategists, the argument still holds. The recovery hasn’t yet been strong enough to raise GDP per capita to what it was before the crisis. Wages grew by 0.7 per cent in the past year. Over the same period, prices rose by over double that – 1.6 per cent. Prices have been going up faster than regular wages in every quarter of every year since 2009. Around 1 in 5 working people are in low pay. Labour say we can’t carry on like this.

This has felt like safe territory for Labour – a policy without a big spending commitment price tag. Ed Balls has already talked about increasing the minimum wage, ending zero-hours contracts, and encouraging more firms to pay a Living Wage – a wage level that allows workers to meet basic living costs. The logical next step now, eight months before the election, is to set out some specifics. Ahead of the start of the Labour party conference this week, Ed Miliband has been busily doing interviews talking about a new pledge to raise the minimum wage to £8 per hour by 2020.

The lack of growth in wages is a real one, and needs to be addressed. But – should Labour find itself in government in 2015 – it will need to tackle the underlying cause, and not the superficial symptom. Getting strong, sustainable growth from businesses will mean that businesses will be able to afford to pay more. That will take investment in skills, infrastructure and innovation.

But there is an even bigger problem than this. The debate about policies like the minimum wage seem to take place in a nice neat world where most people neatly fit into a box labelled “employee”, and most firms are of a reasonable size. It’s neat, because it means that government can help workers by leaning on employers to improve conditions or raise wages – whether by regulation or through tax incentives. But it is becoming harder and harder to believe that this reflects the reality of the new world we are in.

Of all workers in the UK, over one in every seven is self-employed. Among men in work, the figure is even higher – almost one in five men in work are self-employed. In the last year, the numbers in self-employment grew around five times faster compared to the numbers working as employees.

These people will not be touched by increases in the minimum wage – the minimum wage does not apply to the self-employed. And if the minimum wage rises at a rate that businesses cannot afford, we may find that it isn’t the unemployment figures that go up: more people may effectively be pushed into working at what is effectively a lower hourly wage rate in self-employment instead. Almost a quarter of those living in in-work poverty are in households where at least one person is self-employed. To ignore these people would leave a gaping hole in any strategy for tackling low pay.

This is not to say that self-employment should be discouraged. Among the ranks of the self-employed are many success stories. For some, it may well be a route to greater freedom and higher income, and that is a good thing. More self-employment may well help create a more flexible, productive economy. But if Labour is serious about tackling low pay and increasing economic growth, it can’t carry on ignoring the growing ranks of people working for themselves. Politicians need to reflect the new reality of the working population. 

Nida Broughton is chief economist at the Social Market Foundation

Nida Broughton is Senior Economist at the Social Market Foundation.

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Why relations between Theresa May and Philip Hammond became tense so quickly

The political imperative of controlling immigration is clashing with the economic imperative of maintaining growth. 

There is no relationship in government more important than that between the prime minister and the chancellor. When Theresa May entered No.10, she chose Philip Hammond, a dependable technocrat and long-standing ally who she had known since Oxford University. 

But relations between the pair have proved far tenser than anticipated. On Wednesday, Hammond suggested that students could be excluded from the net migration target. "We are having conversations within government about the most appropriate way to record and address net migration," he told the Treasury select committee. The Chancellor, in common with many others, has long regarded the inclusion of students as an obstacle to growth. 

The following day Hammond was publicly rebuked by No.10. "Our position on who is included in the figures has not changed, and we are categorically not reviewing whether or not students are included," a spokesman said (as I reported in advance, May believes that the public would see this move as "a fix"). 

This is not the only clash in May's first 100 days. Hammond was aggrieved by the Prime Minister's criticisms of loose monetary policy (which forced No.10 to state that it "respects the independence of the Bank of England") and is resisting tougher controls on foreign takeovers. The Chancellor has also struck a more sceptical tone on the UK's economic prospects. "It is clear to me that the British people did not vote on June 23 to become poorer," he declared in his conference speech, a signal that national prosperity must come before control of immigration. 

May and Hammond's relationship was never going to match the remarkable bond between David Cameron and George Osborne. But should relations worsen it risks becoming closer to that beween Gordon Brown and Alistair Darling. Like Hammond, Darling entered the Treasury as a calm technocrat and an ally of the PM. But the extraordinary circumstances of the financial crisis transformed him into a far more assertive figure.

In times of turmoil, there is an inevitable clash between political and economic priorities. As prime minister, Brown resisted talk of cuts for fear of the electoral consequences. But as chancellor, Darling was more concerned with the bottom line (backing a rise in VAT). By analogy, May is focused on the political imperative of controlling immigration, while Hammond is focused on the economic imperative of maintaining growth. If their relationship is to endure far tougher times they will soon need to find a middle way. 

George Eaton is political editor of the New Statesman.