Economic Theory

If it ain’t broke, don’t fix it. Self-employment ain’t broke

Matthew Taylor was doing the rounds at the weekend, talking about the Review of Modern Employment Practices which he is conducting on behalf of the government – more evidence that Mrs May wants to rebrand the Conservatives as a sort of Blue Labour.

Taylor’s Review Group has been touring Britain talking with people about the changing nature of work. They seem to have homed in on self-employment. This has been growing sharply, up from 3.8m in 2008 to 4.7m in 2016. There are concerns that some better-off people have become self-employed to avoid tax, and that some of those doing low-paid work are being exploited by cost-cutting employers. There is a particular grouse against app-based forms of self-employment such as Uber and Deliveroo, which have greatly improved services to the public while offering opportunities to many who might be unable to get other types of work.

Last year an ONS report looked at what has been happening with self-employment. It’s a subtle picture. Employers outsourcing work to avoid tax and other responsibilities doesn’t seem to be the explanation for the rising numbers. The authors concluded that much of the recent growth is among part-timers, in particular older workers, who report broadly positive “lifestyle” reasons for doing what they are doing.

These older workers increasingly use part-time self-employment to manage their transition from work to retirement. They have been staying economically active for longer than previous cohorts: part of the increase is down to reduced flows out of self-employment rather than increased inflows into this type of work.

There are certainly some young self-employed people who would prefer conventional full-time employment, but they are a small minority. The overwhelming majority choose to be self-employed and are content with their status, reporting higher levels of happiness and job satisfaction than the working population as a whole.

These subtleties seem to be lost on the Review Group. Taylor apparently wants the self-employed to have essentially the same status as the employed, and be given mandated benefits such as maternity leave, paid holidays and workplace pensions. He was accordingly disappointed that the government backed down on its proposed hike to self-employed NICs.

Many will go along with this, believing that lots of the self-employed are “really” employed by big corporations which should provide appropriate rights and benefits. Recent employment tribunal decisions about the status of Uber workers seem to support this mindset.

There is an extensive labour economics literature about who really pays when the government imposes mandated benefits. Initially employers cough up, but this hits profits and firms react in various broadly predictable ways.

If in a strong market position they jack up prices, in which case the consumer partially pays for the benefit, while consequent reductions in sales lead to some cutback in employment. Firms reduce the quality of goods and services, so the consumer pays again. Part of the burden falls on workers themselves: pay increases are held back and other aspects of working conditions are worsened.

In the longer term employers automate work. Where employees are still used, firms become more selective, going for older, more experienced workers – implicitly discriminating against women, younger workers and some ethnic groups. Unsurprisingly France, with absurdly generous employee rights for “insiders”, has lower female employment than the UK, and massive youth and minority unemployment.

This analysis is ignored by politicians, too many of whom see business as the enemy. They think that ever-increasing “rights” can be met from business profits. This deceives the public, raises costs and ultimately reduces employment. I can understand where Taylor is coming from, but quite why a Conservative government seems prepared to indulge this stuff is beyond me.


This article was first published in City AM.

Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.

Leave a Reply

Your email address will not be published. Required fields are marked *