Labour Market

Where have all the self-employed gone?

Much is being made at the moment of the rise in economic inactivity, and of the fact that total employment has not yet returned to levels reached pre-Covid. There are said to be 500,000 – 600,000 ‘missing workers’. This has implications for the slow growth of GDP, which has not reached pre-pandemic levels and is now slipping back. It also has implications for tax revenue on the one hand and public spending on the other.

Mention has been made of the exit of older workers retiring early, and younger workers who have been going into higher and further education in increasing numbers. Inadequate childcare provision has also been flagged up as a reason why mothers are not returning to the labour market quickly.

As I pointed out in a blog last week, there has been a fuss about the rising numbers of working-age people registered as unfit to work. It is possible that some of this is fraudulent, but there are other plausible explanations, such as Long Covid (although this does not seem to have been a major contributor to the problem), the growth of NHS waiting lists, and increasing numbers of people presenting as seriously ill following diagnosis delays during lockdown.

There is also Labour Force Survey evidence that two big areas of self-described work-limiting ill-health that have grown rapidly during the last two and a half years are chronic back pain and mental health issues.

It has been suggested that back pain may have increased partly as a by-product of working at home, with erstwhile office workers sitting for long hours with a laptop literally on their laps in bedrooms and on sofas rather than at ergonomically suitable desks. And mental health problems such as stress and anxiety, which disproportionately affect the young, shot up worldwide during lockdowns, according to the World Health Organization. In the UK the NHS mental health services have found it difficult to cope with this.

Analysis of rising working-age inactivity also needs to take into account falling job opportunities in particular occupations such as retail, bar work and restaurants which have been hit by lifestyle changes brought about by the pandemic, and in particular regions. The recent high levels of job vacancies have not been distributed equally amongst occupations and regions, and despite low levels of unemployment many older workers may have found it difficult in a rapidly changing labour market to find new jobs for which they are suitable in their neighbourhood.

Economists, media commentators and politicians are now aware of most of these factors. But one aspect of the ‘missing workers’ which has not been talked about concerns the division of the workforce between employees and the self-employed.

It is easy to confuse the numbers in employment (which include the self-employed) and the number of employees (people who work for an employer). It is the former which is below pre-Covid levels. LFS data, and PAYE figures on payrolls, show that the number of employees actually rose between the immediate pre-Covid period (December 2019-February 2020) and June-August this year. The LFS figures, for instance, show an increase from 27,856,000 to 28,330,000, a rise of nearly half a million. By contrast, over the same period the number of self-employed fell, from 5,028,000 to 4,292,000.

(Sharp-eyed readers will see that this implies an overall employment gap of only just over 260,000. The figure of 500-600,000 missing workers reflects the fact that the size and composition of the working-age population changed during the period, and is based on an estimate of what would have happened if previous activity rates had been maintained).

The self-employed had a pretty rough time during Covid. While some could continue to work from home, large numbers of self-employed workers – those running small cafes or hairdressing salons, or those normally working in other people’s homes as decorators or cleaners – were totally unable to work for long periods.

Although some financial assistance was made available, it was neither as generous nor as well-targeted as the furlough scheme for employees. Many self-employed workers received no support.

Where business contacts and customer bases atrophied over long lockdowns, and unusable premises came up for lease renewals, many older self-employed workers (and the self-employed are typically older than employees, with many over state pension age) will have decided to call it a day.

In addition, the longstanding hostility of the Treasury to the self-employed, many of whom they suspect of being tax-dodgers, was manifested once more. There was a change to IR35 rules which in effect pressured private sector employers to reclassify contractors as employees so that they paid more tax. There were threats by Rishi Sunak to raise national insurance contributions by the self-employed. And small businesses, often with little expertise in digital technology, are now being obliged to report revenue in real time via the Making Tax Digital scheme.

Regulation in general has a disproportionate effect on the important minority of self-employed people with a handful of employees, and during the pandemic ever-changing rules on social distancing and opening hours made life very difficult and expensive for small manufacturers, pub landlords and restaurant owners.  All this must have taken its toll.

Self-employment is an important part of the economy. At times, for instance during the recovery from the last recession, it has contributed significantly to GDP growth.

For many people, such as women with small children, people with disabilities and some ethnic minorities with limited English it may sometimes be the only feasible form of employment, while for many more it offers an attractive lifestyle with a degree of independence from the state and an increasingly conformist, sometimes oppressive, corporate environment. Setting up their own business remains an ambition for large numbers of people, particularly the young.

Many politicians and commentators seem to assume that efforts to boost employment should take the form of rejigging the benefit system to encourage greater labour force participation and to encourage part-time employees to work longer hours. Others advocate the relaxation of immigration rules. But they should also look carefully at what can be done to reduce the disincentives to self-employment.

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 *