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Ian Brinkley
Economic Advisor
Ian Brinkley

Piecing together the self-employment puzzle

Authors: Ian Brinkley

21 August 2014

The ONS statistics on self-employment released yesterday tell us a number of important things about the labour market recovery. 

Firstly, it takes a little of the gloss off the apparently stellar job generation performance of the UK labour market. The UK labour market has still performed well, but not quite in the ways we had been assuming. The  big increases in employment have been driven as much by people staying on longer in jobs as by new hires. The ONS concludes that , at least for self-employment,  most of the increase since 2009 can be explained by a big drop in outflows from self-employment rather than more people becoming self-employed. 

It would be good if we could confirm whether  this is equally true for employees. We know that average tenures of employee jobs and the share of longer tenure jobs have been increasing in recent years when we would have normally have expected them to fall a little as new jobs, by definition, are short duration. This is consistent with at least some of the rise in employee employment being because of falls in outflows compared with previous recoveries.  Some of the fall in outflows may be due to temporary factors such as lack of confidence in future employment prospects or financial insecurity which deter some people from risking a job move. This will work itself out as the recovery continues. But I suspect it also signals a significant structural change in the labour market, driven by in part by the ageing workforce.

Secondly, we have not seen a massive revival in entrepreneurialism that some of the more excitable commentaries have been suggesting. Most of the rise in self-employment is not due to new enterprises but existing enterprises continuing in existence for longer than they otherwise would do. The ONS data also reminds us that while the share of self-employment is at a record high, it hardly adds up to a massive restructuring of the labour market – the previous peak in 1995 was just under 14 per cent and the current figure is 15 per cent. Policy makers should not conclude that the rise in self-employment means that further efforts to improve the quality of  support offered to new and potential new entrepreneurs are unnecessary.

Thirdly, it helps clear up some of the puzzle about why there has been such a big increase in self-employment in the first place, as there was no obvious policy reason or major market or industrial restructuring that could easily account for it. Policy has, quite rightly, been encouraging older workers to continue in jobs longer – and it looks as if the combined impact of campaigns and more widely available advice, pension and labour market reforms are having some success. 

But it does not help us at all to resolve the puzzle of why, despite an apparent 22 per cent decline in self-employed incomes, inflows into self-employment were unchanged and exit rates fell. We might have expected the reverse.  Moreover, other survey evidence tells us that, at least post-recession, most of the inflow into self-employment were out of choice. The ONS suggest survey evidence on self-employed incomes is inaccurate and some of my colleagues at Lancaster University strongly suspect the surveys under-record income from self-employment. One possible explanation therefore is that the decline is over-stated. 

Fourthly, there are some interesting changes going on within self-employment, even if it is still quite hard to pin down. The ONS highlight the big rise in self-employed who report that they are managers, with significant increases in professional and associate and technical self-employed jobs since 2008. So while we have also seen some growth in more “traditional” self-employed occupations, there is a tilt towards the higher skilled, white collar occupations and this seems to have accelerated since the end of the recession. Now, it may be that people in these occupations are more likely to stay in work longer and there may be some over-reporting – as the ONS notes, some of the self-employed may report they are managers because they manage themselves, rather than their actual occupation. My guess is nonetheless that we are seeing an underlying shift towards higher skill, white collar self-employment enabled by new technologies and the growing market for higher value added business services – and that this will strengthen over the next decade.