Why self-employment is the future of work

Most new jobs created since the recession have been freelance—and Britain is leading the trend
May 21, 2014

Self employment: "whatever your attitude you have to acknowledge that this is a seismic shift in the way we live now."

We are so attached to the idea of getting and having a job that it is hard for us to grasp the scale and speed with which labour markets are changing. It is possible, indeed probable, that people entering the workforce today in the world’s developed economies will spend half or more of their working lives not in steady jobs but being self-employed.

This is a social and economic transformation as significant as the expansion of tertiary education in the 1960s and, more recently, the shift to flexible retirement ages. The trend is discernible in several advanced economies, including the United States (where one should include “proprietors” in the figures, because otherwise the numbers look very low). But things are changing fastest in the UK. Not only do we have the highest proportion of self-employed people in the workforce since the Second World War—15 per cent, slightly higher than the US and considerably higher than Germany or France—it is also probable that during the life of the next parliament there will be more self-employed people than government employees.

The growth of self-employment in the UK since the recession has been remarkable. The government celebrates, with some justification, the fact that there are more people working in the UK than ever before. But 83 per cent of the new employment created since 2007 has been in people working for themselves. About half of that gain has been in people working part-time, with women accounting for a larger proportion of the gain than in previous periods. Historically, they have accounted for about 30 per cent of the self-employed, but they account for 60 per cent of the increase in self-employment since 2007.

Many of those who have become self-employed regard themselves as under-employed, because they are working for fewer hours than they would like. But the increase in self-employment is not simply an effect of the recession—levels of self-employment were rising beforehand, too. That said, the reasons for the shift to self-employment differ depending on the economic climate. In bad times, people who have been made redundant pick up whatever work they can get, whereas in good times they have the confidence to set up on their own. But the striking thing is that the growth in self-employment has been remarkably persistent. There are now some 40 per cent more people self-employed than in 2000, but only about 7 per cent more in jobs.

Why? Surprisingly there does not seem to be much comparable international research on this. There are bits and pieces, including an excellent study last month from Morgan Stanley, written by the economist Charles Goodhart. It suggested that the UK economy might well be 4 per cent larger than the published GDP per worker figures recorded. The explanation for the difference is that there has been a surge in the growth of the informal economy following the VAT increase to 20 per cent, with people doing much more work for cash rather than reporting it to the tax authorities. If true, that would explain a lot about what has been happening: why, for example, has consumption been so strong and why did the amount of notes and coin in circulation jump suddenly when VAT went up?

If we can miscount the economy by such a large percentage it is hardly surprising that it is tough to find answers to nebulous questions such as whether the shift to self-employment is voluntary or not. A survey last month for the Resolution Foundation think tank found that 72 per cent of people who had become self-employed in the past five years preferred their new status, while 28 per cent would rather have remained in a job. It might be that people are initially forced to become self-employed, but then find they rather like it once they have become used to it.

What we can do is to draw up a list of the various forces at work, even if it is impossible to weight their importance with any precision. Here are a dozen. Their sheer number shows why this trend is more pronounced in Britain than in many other countries, and why governments are struggling to respond.

One: increasing longevity. The ageing of our society, coupled with the improved health of older people and lower-than-expected pension returns, has certainly pushed more people to remain in the workforce beyond normal retirement age. While this would not necessarily lead to a rise in self-employment—there is no reason why such workers should not remain in employment, maybe on shorter hours—in practice it is often simpler for people to become self-employed. It gives freedom both to the worker and the employer and it changes the nature of the relationship in ways that many older people prefer. It is easier to say no: to negotiate work on one’s own terms rather than be tied in as an employee.

Two: the shift to services and in particular the changing balance of activities within the service industry. Demand for labour in growing service industries, such as the hospitality business, is particularly for flexible labour. The need to staff up to meet increased demand, or staff down if business is slack, is obviously much less predictable than in manufacturing, but it is also less predictable in growing service industries than in shrinking ones. For example, a hotel manager will have a general feeling for the likely trade on any one particular night, but will only really know how full his establishment is a couple of days beforehand. A bank manager, by contrast, knows how many tellers he needs on any particular day. The hotel trade, however, is growing, while bank branches are being shut.

It is quite possible to meet shifting demand for labour by offering so-called zero-hours contracts (where employers do not offer employees guaranteed hours), and of course that is happening. But if you operate a rota of self-employed people you arguably have even greater flexibility than you do when using zero-hours contracts.

Three: the squeeze on the public sector. Quite aside from the mathematical impact on the proportion of self-employed by the decline of people employed by the state, government agencies including the NHS need to get the work done, which will sometimes involve hiring the services of self-employed people.

Four: technology. Communication technologies ease the path to self-employment in a number of ways. Most obviously they enable people to work at home and communicate with other workers and while in theory homeworkers can be on payroll, in practice self-employment contracts usually work better. In other words, technology facilitates outsourcing. It also reduces the cost of entry into service businesses, because a new business can market itself globally from a laptop on the kitchen table. Comparable data is hard to find but it looks as though the UK has a higher proportion of teleworkers than any other country, at around 10 per cent of the total, with 20 per cent doing some part of their work on screen away from the office.

Less obviously, new technologies enable employers, or rather would-be employers, to manage a freelance workforce more effectively, contacting people automatically wherever they are, as and when they are needed.

Five: there are technical innovations, such as eBay, that offer easy entry for would-be entrepreneurial traders. The UK has the highest proportion of online sales of any large economy, at 13.5 per cent.

Six: the fashion for entrepreneurship. Political support for business creation is cross-party, pushed as much by Gordon Brown as by the coalition. It is, so to speak, the acceptable face of capitalism for people to form a business and to be successful at it, as opposed to being successful in a job and being rewarded with a bonus. This is reflected in the popularity of television programmes such as Dragon’s Den and The Apprentice.

Seven: labour legislation. If a company can buy in a skill rather than have to increase its fixed costs by employing someone extra to do it, it has a powerful incentive to do so. Additional burdens on employers, such as paternity leave for fathers, further boost the trend to self-employment.

Eight: tax. Anyone self-employed, either as a sole trader or as the proprietor of an incorporated business, should pay tax just as an employee would. But quite aside from the greater scope for tax evasion—which, if those estimates noted in the Morgan Stanley paper are right, is considerable—there are practical advantages to self-employed status. These include the ability to leave funds in the business and borrow against them, and to withdraw income in the form of dividends rather than salary, thereby cutting national insurance contributions.

Nine: the growth of creative and cultural industries. It is natural and normal in these “new” industries for people to work for themselves. Indeed, there is really no secure employment. So as the balance of activity shifts towards this, it would be normal and natural for the balance between employment and self-employment to shift too.

Ten: the celebrity culture. This is associated with the growth in the creative industries. We have created a huge demand for celebrities and there is a huge churn in their numbers. Large numbers of people, particularly the young, are moving in and out of this space, or providing services to would-be or established celebrities.

Eleven: the growing importance of craft skills. We have had a long period when crafts were in decline and the mass production society still rules. But as lower-waged countries have come into mass production, it has become clear that one of the competitive advantages of the UK is in craft production: top-end bikes and watches, for example. Instead of throwing away, you repair. Craft workers may be on payroll, but they are just as likely to be self-employed, whereas mass production workers are invariably employed.

High-end crafts are a big source of UK employment, with many practitioners working for themselves.

And finally, twelve: the rise of the portfolio worker. The division between core workers and portfolio workers was first identified by the business writer and teacher Charles Handy in 1989 in The Age of Unreason. The idea was simple enough and it was his genius to spot it. It is that people increasingly spend the early part of their careers as core workers; that is, working full-time for an employer, usually jolly hard. Then at some stage in mid-career, perhaps in their 40s or 50s, they would have built up the competence and the contacts to enable them to set up on their own, working for a variety of different firms. They then have a portfolio of part-time jobs rather than being employed full time by anyone. What was just becoming evident a generation ago is now quite normal.

These are not the only forces driving the shift to self-employment. Anyone thinking about it, or maybe setting up themselves, could doubtless add a few more. There may, for example, be an association with immigration and with inequality, though you have to be careful about which way round the relationship works. (For example, does the rise in self-employment lead to greater inequality, or does greater inequality create more opportunities for the self-employed? Maybe both.) But what is beyond dispute is that self-employment is rising, and that seems unlikely to reverse any time soon. That leads to two further questions: how far will this run? And what are the implications for policy?

To begin with the first question, it is at least conceivable that having doubled over the last 30 years the proportion of self-employed workers could double again over the next 30. By 2045, one-third of the workforce could be self-employed. A much higher proportion is likely to be self-employed at some stage in their career. If this is right, it will be a shift as big as the ending of the jobs for life culture a generation ago. Even if the growth tapers off at a quarter of the workforce, policy will have to adapt.

At present, the tax system and labour market legislation are both built around the jobs model, not the self-employment one. Something as simple as the minimum wage is based on the idea that someone is working for someone else and not for themselves. Concern about zero-hours contracts is based on the assumption that jobs should specify a number of elements, including the hours to be worked and the timing of payment for that work. Paradoxically, efforts to pin down the hours worked may actually further the shift to self-employment. A rota of employees would be replaced by a rota of the self-employed.

So how do you rethink policy?

A good starting point is to make people aware of the need to save. It may well be that, in practice, being self-employed is actually more secure for many people than being in a job—there are now no safe jobs. Better to have several customers than a single employer that may go bust. But it does mean that people need a larger cushion of savings than they would if they had job rights with a solid employer. So there is an education task to be done. That extends from principles, such as the need to have a nest egg, to practicalities, such as thinking in terms of building transferable skills, the practicalities of running a business, and the responsibilities that people working for themselves have to take on that would hitherto have been managed for them.

Quite how you do this is another matter. Is basic financial management something that should be taught in schools? Or does the accountancy profession have a role to spread skills beyond its practitioners? Is this a new vocational option? The point is that there are a number of things that employees take for granted that people working for themselves have to learn. This new labour market will function better when a greater proportion of self-employed workers know what they have to do.

Pensions are another obvious area. It is a huge issue and one that goes far beyond the self-employed. Our company pension system has been undermined, some would say destroyed, by a combination of government policy and poor investment returns. We can’t yet see to what extent the latest reforms will enable it to be rebuilt. What we do know is that pensions should be attached to the person rather than the job and that they should be constructed on the basis that everyone is likely to have a period of self-employment at some stage during their lifetime.

As for taxation, here the pressure will be for simplification. If a smaller proportion of government revenue comes from PAYE, and a larger proportion from self-assessed income tax and corporation tax, government revenues will become more lumpy and less secure. Governments will be troubled by that—understandably so. They have to protect revenue and there will inevitably be rising tension between the need to encourage business (including the self-employed) and the need to collect the money. However, the simpler the taxation system the easier it will be to understand and the harder to avoid.

The next set of challenges are those for the rest of the private sector. Services are designed for sizeable companies and for people in jobs. Anyone self-employed who applies for a mortgage will have a much tougher time than someone in an apparently secure job. Professional advisory services—accountancy, legal, fund management, and so on—are readily available but they are expensive. The challenge will be how to give effective advice that people can afford. It is a huge opportunity, but given how difficult the relations often are between small businesses and their bankers, it will be a tough one.

There are inevitably implications for politics but we should not assume that the trend naturally benefits the right, despite the usual caricature of the government-hating small businessman. The new generation of self-employed may have rather different attitudes from the last, and there is no reason why the left should not be its champion. Still, when that tipping point is reached and there are more self-employed than state employees, the implications for politics will be profound. Trade unions face a serious challenge too.

Perhaps the most interesting thing, though, will be the impact the shift has on wider social attitudes. It is not just that a larger proportion of the workforce will be self-employed at any given time. Society will be reshaped by the fact that most people will be self-employed at some stage in their lives. The experience will be pretty much universal. But if the experience is universal, then we will all accrue some of the skills and attitudes that have to learnt during that time. For example we may become more self-reliant. We may become better at finding customers, or at least at handling our personal finances. And we should understand the world of business better if we have all had to run one, however small, at one time or another.

People have different responses to the shift to self-employment. For some it is another aspect of rising insecurity, and one to be regretted. For others it marks the triumph of the little man, and especially woman, over adversity—a response to tough times. For still others it is a celebration of independence, freedom from the grind of working for someone else. But whatever your attitude you have to acknowledge that this is a seismic shift in the way we live now, and it is happening more swiftly and more obviously in Britain than just about anywhere else.