Self-employment disentangled

There has been a major shift in the labour market towards self-employment with 4.8 million self-employed workers in the last quarter of 2016 — almost a 50% increase compared to 2000.

Self-employed profile

The trend has been particularly strong for part-time self-employment, which increased by 88% between 2001 and 2015 (compared to only 25% increase in part-time employment in the same period). The number of full-time self-employed workers increased by 25%.^[1] While still a majority of self-employed workers are men (mostly due to their dominance in the full-time self-employed group) the propensity of women to become self-employed is rising (women already account for 60% of part-time self-employed group). These numbers indicate that — while the unstable post-crisis market could have contributed to the shift — the trend has its origin much earlier.

Is it a good thing or a bad thing?

Being bombarded by articles claiming, on the one hand, that self-employed earn less than 20 years ago,^[2] and on the other that they earn more than average despite working 10 hours less per week^[3] or are at least happier in work^[4] — it is hard to make up one’s mind whether a growing importance of self-employment is a good or a bad thing. The connotations of self-employment range from slave wage, uncertainty and lack of prospects to flexibility, independence and work satisfaction.

So which one is it? There are a few trends and facts that could help explain the seemingly contradictory conclusions.

Self-employed workers are not a homogenous group

It is more of a catch-all category rather than a meaningful characteristics. Covering a wide range of people — entrepreneurs, owners of family businesses, freelancers, parents taking care of small children, employees transitioning to retirement, students, people forced to become self-employed by margin-seeking firms, people not being able to find a satisfactory job, and possibly some de facto unemployed workers who do not want to admit to have no job — it is clear that averages might obscure the complexity of motivations, objectives and economic circumstances associated with self-employment.

In this context, a useful way of categorising self-employed workers is by their motivation, which could be:

• A negative choice — this is where self-employment is forced upon workers who would in fact prefer to be employed.
• A neutral choice — self-employment is a natural path for entrepreneurs. Especially in the light of the available technological and regulatory solutions starting a new business is perhaps simpler than it ever was.
• A positive choice — this is where self-employment is a conscious choice made after weighing its costs and benefits compared to other forms of employment or unemployment. This category is likely to include skilled freelancers but also parents who would have otherwise had to quit their jobs to take care of their children, and people in the (pre)retirement age, who want to mitigate any shortages in pension pots and/or avoid the feeling of being obsolete.

ONS data show that, regardless of age, a majority of workers choose self-employment for positive or neutral reasons, and a vast majority is not seeking a different or additional job while being self-employed. That said, there is likely to be a non-trivial number of self-employed workers who are not satisfied with their employment status but find it hard to change.

Working hours

Fewer and fewer self-employed people work long hours. For those in part-time self-employment ONS data clearly show that they work less hours than part-time employees. For full-time self-employed workers, who historically were more likely to work long hours (i.e. more than 45 per week), the trend in downward. This means that a crude weekly average earnings among self-employed workers are likely to decline, but it is not necessarily a sign of their deteriorating wellbeing.

The starting point

Part-time self-employment is more often chosen by high-earners. As Labour Force Survey shows, the median hourly earnings of part-time self-employed workers were significantly higher before transitioning to that form of employment that the median hourly earnings of those transitioning to a new part-time job as an employee. To the extent that hourly earnings are an indicator of labour quality, part-time self-employed workers are more likely to be skilled and/or experienced than those in conventional employment contracts. This pattern has been significantly weaker among full-time workers. This suggests that part-time self-employed workers statistically might be more likely to develop successful and well-paid careers than full-time self-employed workers. Then depending on whether the focus of a particular analysis is, say, on recent trends (where part-time workers overtook the scene) or long-term statistics, the conclusions will be different.

Work satisfaction is more complex than salary

Earnings, while straightforward to analyse, capture only one aspect of one’s job. For some being self-employed has a lifestyle value on its own despite lower monetary compensation.

Limited data

As trivial as it might sound, one should keep in mind that the UK’s official wage data does not cover self-employed, which means that the gap is often filled with ad hoc surveys and research. This increases variability of results from one study to another depending on the sample, approach and — unfortunately — the initial hypothesis one is trying to confirm.

So the answer is…

… as unsatisfying as it may sound — it is complicated. Self-employment in itself is neither good nor bad, it is whatever we make it to be. And given its rapid growth it will be key in the coming years to (carefully) take advantage of the opportunities self-employment creates for individuals and the economy as a whole.

[1] Office for National Statistics (2016), “Trends in self-employment in the UK: 2001 to 2015”.

[2] The Financial Times, Self-employed earn less than they did 20 years ago, October 18, 2016.

[3] “Definitive Study of the Self-Employed” by Intuit QuickBooks from 2016.

[4] The Financial Times, Self-employed happier in work than employees, UK survey finds, May 28, 2014.