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7 January 2015

Is being self-employed becoming the new normal?

In the last four years, 40 per cent of new jobs have been in self-employment. This is more likely to be a permanent shift than a temporary phenomenon.

By Izzy Hatfield Izzy Hatfield

Much has been made of the rise of the UK self-employed, and indeed it looks like they’re here to stay. Over one in seven of the workforce is self-employed; from rent-a-chair hairdressers to the owners of tech start-ups, the self-employed are everywhere. This level of self-employment puts us above the European average, an unusual position for a western European economy.

The surge in self-employed workers has driven our jobs recovery, 40 per cent of new jobs in the last four years have been in self-employment, and many commentators are delighted with the figures. But, as IPPR’s new report shows, no other country in Europe has relied on growth in self-employment to the same extent. Admittedly many countries are yet to see jobs growth of any kind, but Germany, amongst others, has seen jobs growth composed entirely of new employee jobs, along side a fall in the number of self-employed.

Self-employment is often used as a synonym for entrepreneurship; and of course we want innovation and creativity in the UK economy – these inputs, which are sometimes found in self-employment, can fuel growth. But if high self-employment rates are the new normal, then there’s a lot more than entrepreneurship for policymakers to consider.

There are many differences between Germany and the UK’s self-employed: German self-employed workers are more likely to have their own employees (44 per cent of them do, compared to the UK’s 17 per cent) and in Germany they are more likely to be highly-qualified where as in the UK self-employed workers tend to be lower levels of qualification than the average worker.

One of the most troubling findings about self-employed workers in the last couple of years has been the fall in their average earnings. IPPR research shows that a typical self-employed worker in the UK earns just over half the amount a typical employee earns. This has slid from around three quarters in 2007. Earnings growth has been poor for employees throughout this period – so this relative fall for the self-employed could represent an even greater decline in their living standards. Similar trends have been seen in other European countries, although Germany has seen a much lesser fall.

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Only 9 per cent of self-employed workers were receiving training in 2012 compared to 17 per cent of employees. This figure has fallen by six percentage points since 2007. Difficulty accessing training may have knock on effects on the ability of new business owners to grow and develop their company – critical to the contribution of entrepreneurship to economic growth. For sole traders, a lack of training may mean limited progression opportunities and a more difficult route out of low pay. Government policies must adjust to the new labour market reality by boosting the support available to self-employed workers to access training and develop their skills.

Between 2007 and 2012 the number of self-employed workers looking for another job doubled, with the main reason for this cited as needing a job with more hours of work. This combined with relatively low earnings suggests that our new self-employed jobs may not be the entrepreneurial success stories we need. Instead the rise in self-employment partly represents a growth in hidden underemployment. It might, like the proliferation of zero hours contracts, be more evidence that being in work is no longer a sure fire way to escape poverty. After all, those living below the poverty line are now just as likely to be in work as out.

Nonetheless, IPPR research suggests that for some disadvantaged groups, self-employment can represent a valuable route into work. For mothers looking for flexible work; for older workers looking to top up their pension; and for migrants struggling with few contacts, starting a small business or working independently can provide a route into the labour market not available in the employee market. Being your own boss has great advantages, and in 2009 nearly half of Europeans expressed a preference for this way of working.

Policymakers need to consider self-employment carefully in order to support those who choose self-employment, most critically for those that haven’t really chosen self-employment at all but have turned to it as a last resort. High self-employment levels are the new normal and this means we need to support economic growth and the living standards of the self-employed.

Izzy Hatfield is a researcher at IPPR