The self-employment boom: Key issues for the 2015 Parliament
During the 2008-09 recession, the number of people in employment in the UK remained relatively stable, and it is has since reached a level well above its pre-crisis peak.
This strong performance is partly due to the growth in self-employment, which reached a record high of 4.5 million in 2014. The growth is likely to reflect both temporary and permanent changes to the economy, together with government policy, particularly on tax and welfare.
Most people who are self-employed have chosen to be so voluntarily and many value the freedom it provides. But the flexibility cuts both ways, and the growth in the numbers of self-employed, particularly at the lower end of the income distribution, raises questions about job security.
Given that self-employed workers earn less, on average, than other workers, the growth in their numbers may also have implications for tax revenues and the welfare bill.
The current self-employment situation
Currently around one in seven people in employment are self-employed in their main job. The prevalence of self-employment varies across the country: it is higher in the south than the north, and London has the highest proportion of people who are self-employed, while the north east has the lowest.
Those in self-employment earn less, on average, than other workers. Data from the Family Resources Survey shows that in 2012/13, the average (median) income for all people with income from self-employment sources was around £11,000.
Incomes for the self-employed have also fallen faster in recent years than for other sorts of worker: adjusting for inflation, average income from self-employment fell by 22% between 2008/09 and 2012/13.
Why has self-employment grown?
Whilst the number of people becoming self-employed has increased modestly since 1994, it is the dramatic drop in the numbers leaving self-employment that has been the main driver of growth over the last five years.
Chart 1: Number of employees and self-employed people
The growth in total employment in recent years has been driven in part by rising levels of self-employment.
Change in the number of employees and self-employed people since Q1 2008, UK (thousands)
And while the growth in self-employment may have been accentuated by the 2008-09 recession, it is a trend that predates the downturn.
Chart 2: Total workforce that are self-employed
The growth in self-employment is a trend that predates the 2008-09 recession.
Percentage of total workforce that are self-employed, Spring 1975 to Q4-2014
There are a number of potential underlying causes:-
The economic cycle
Following the economic downturn in 2008, the number of vacancies was relatively subdued until 2013. A lack of vacancies in the economy may have forced workers to become self-employed to maintain their skill sets, and encouraged those who were already self-employed to remain so.
The cost of starting many types of business or becoming ‘freelance' is becoming cheaper thanks to the growth of internet commerce and the development of software (e.g. Uber, eBay and AirBnB) that matches self-employed workers with consumers demanding their services.
In response to the lack of opportunities in the labour market, the previous Government introduced a number of schemes that encouraged people to start their own businesses.
Schemes such as the New Enterprise Allowance were designed to “encourage more people to consider becoming self-employed as a way to get back into work.”
The Office for Budget Responsibility has suggest that individuals may have been encouraged to declare themselves self-employed (or remain in self-employment) on low income, rather than unemployed, in order to claim tax credits following the introduction of tougher Jobseeker's Allowance sanctions introduced in 2012.
Rising life expectancy and pension changes
Rising life expectancies, the weakness in the economy and a fall in annuity rates may have encouraged some older workers to continue in self-employment for longer than they may have done 10 years ago, while others may have moved into “small scale” self-employment after retiring.
There is also a suggestion that many workers may have delayed their retirement in the hope that there would be a recovery in annuity rates. Over the coming years, the changes made to annuities, which remove the requirement to buy one, came into effect in April 2015 may also affect the number of older self-employed workers in the labour market.
The ‘grey economy'
The growth of the ‘grey economy' – involving transactions that are legal, but not reported to the authorities in order to evade taxes – may also have an effect on the numbers of people declaring themselves self-employed.
Over the course of the last Parliament, the rise in VAT and higher excise taxes, coupled with changes to the benefit system and fewer job vacancies, may have encouraged more people to participate in the grey economy, something that is easier for self-employed people than for employees.
What are the implications?
If self-employment continues to grow during this Parliament, and the growth continues to be concentrated at the lower end of the income distribution, then this could have fiscal implications. In particular, the tax credit caseload could increase as more people become eligible for the working element of tax credits, while the additional tax revenues that come with rising employment will be smaller.
Though most people in self-employment say they favour this way of working, the continued growth of this type of work raises questions about the changing structure of the UK's labour market, and the implications of growing numbers of individuals with less predictable income and weaker job security.
There could be growing pressure for the Government to reduce administrative burdens facing the self-employed, and to insulate them against the risks to their income.