We know so little about the economics of the growing number of UK self-employed

The post credit crunch period in the UK has seen a labour market performance of two halves. The good part has been the way that employment has been strong as illustrated by the latest official Economic Review.

The UK labour market continued to show its strength in the 3 months to April 2016, with the employment rate among those aged 16 to 64 increasing to 74.2%, up from 74.1% in the 3 months to January 2016 and 73.4% over the year.

This is a factor in the unemployment rate fall to mid-2005 levels. However the less good part has been the way that wage growth has broken with past relationships and remained weak. Old employment models ( some of which exist unchanged in Ivory Towers) would predict wage growth of the order of 4-5% if they looked at the employment/unemployment situation. Whereas the reality is of numbers close to 2%. The welcome improvement in real wage growth has in fact mostly come because of lower inflation rather than any acceleration in wage growth.

Employment for older people

There are no doubt some in the older age groups who welcome the availability of work, however some may be less willing.

Female participation over the age of 60 has increased by 21.8% since 2010, almost double that for males, and is likely to be heavily influenced by the increase in the state pension age for females in recent years.

One thing we can be clear about is that “early-retirement” is less frequent now and that this has impacted on the labour force.

The increase in the activity level over the age of 50 represents the largest driver of the growth in the activity level for men and women since 2010,

The self-employed

Tucked away on its website the Office for National Statistics has done some in depth research into self-employment. Let us remind ourselves of the basic theme at play here.

The level of self-employment in the UK increased from 3.8 million in 2008 to 4.6 million in 2015.

However this added to something which seems to have begun from around 2001 as we note like in my analysis of Monday that the credit crunch has often added to pre-existing trends.

While this strong performance is among the defining characteristics of the UK’s economic recovery, the recent rise in self-employment is the extension of a trend started in the early 2000s.

We do learn some other things as well.

Part time self-employment grew by 88% between 2001 and 2015, compared to 25% for the full-time mode. As a result, part-time self-employment accounts for 1.2 percentage points of the 1.6 percentage point increase in the self-employment share of all employment between 2008 and 2015.

There seem to be various factors at play but the research suggests much of this is older people using it as a way of transitioning to unemployment and if asked say they are happy with their lot. Indeed there is a clear group who have had high earning jobs and seem content with their lot. We also get an insight into both which economic sectors they are in and also the geography.

The fraction employed in finance and business services has risen considerably, they are relatively concentrated in the South East and London

We even get a brief glimpse of the wages/earnings situation.

Analysis also suggests that those moving from employee positions to self-employment tend to have somewhat higher pre-transition hourly earnings than workers moving to new employee positions: trends which are more consistent with workers making a positive choice, rather than being forced to be self-employed.

So a hint for some of them at least. For newer readers the reason I highlight this is that the self-employed are excluded from the official wages series data, both the monthly average earnings series and the  annual ASHE survey. This was never a good state of play and it gets worse as the number of self-employed grows.

Today’s Data

In terms of quantity the situation continues to improve.

The employment rate (the proportion of people aged from 16 to 64 who were in work) was 74.4%, the highest since comparable records began in 1971……The unemployment rate was 4.9%, down from 5.6% for a year earlier. The last time it was lower was for July to September 2005.

However the price of labour continues to disappoint as we see that even in what looks like very favourable circumstances ( this is what was previously described as full employment) it does this.

Average weekly earnings for employees in Great Britain in nominal terms (that is, not adjusted for price inflation) increased by 2.3% including bonuses and by 2.2% excluding bonuses compared with a year earlier.

So real wage growth relies on low inflation which is troubling if you expect inflation to rise as I described only yesterday.

Between March to May 2015 and March to May 2016 in real terms (that is, adjusted for consumer price inflation) regular pay for employees in Great Britain increased by 1.8% and total pay increased by 1.9%.

Those who prefer our old inflation measure the Retail Prices index or RPI can knock around 1% off that. Oh and that self-employment issue will not go away.

self-employed people increased by 300,000 to 4.79 million (15.1% of all people in work) ( this is over the past year).

Post Brexit?

The numbers above are before the Brexit referendum but we do get a look from the Agents of the Bank of England about the post referendum economy.

A majority of firms spoken with did not expect a near-term impact from the result on their investment or staff hiring plans. But around a third of contacts thought there would be some negative impact on those plans over the next twelve months.

So for the majority L.I.F.E.G.O.E.S.O.N as Noah and the Whale put it whilst some have fears about activity slip-sliding away. The real question is to whether the latter group feel this temporarily or more permanently.

Comment

The official data tells us a rather hopeful story. Here we have strong employment growth which has pushed the unemployment rate much lower and real wages are growing. The cloud in that silver lining is that wage growth is very low for such circumstances. Also there are some more pages you can tear out of your economics textbooks such as the ones covering “full employment” and NAIRU ( Non accelerating inflation rate of unemployment).

Meanwhile if we dig deeper we see signs that the official picture is too rosy. For example whilst I welcome the extra research into the self-employment sector we need to know much more about what they earn and where it stands on the choice/compulsion spectrum. Also there is the issue of underemployment which our official monthly data misses out. According to the TUC it exists.

There were 2.3 million people underemployed in early 2008, however underemployment rose rapidly following the recession and reached 3.4 million in early 2014. It has fallen slowly in the last year to reach just under 3.3 million in early 2015 – but this is still over 900,000 higher than it was before the recession.

Hopefully it has improved over the last year and there is an official update suggesting it fell to 8.9% in the first quarter of this year. But it is apparently outweighed by overemployment of 10.5%!

Meanwhile at the stroke of a pen or indeed movement of a computer mouse reported reality can get better. From the Institute for Fiscal Studies.

Prior to this year, DWP’s official statistics adjusted for inflation using the (now discredited) Retail Prices Index (RPI). Given that RPI inflation is generally higher than CPI inflation, this means that trends in living standards now look more favourable than did previous versions of the government’s statistics.

Time for Freddie Mercury and his band mates.

It’s a kind of magic,
It’s a kind of magic,
A kind of magic,

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28 thoughts on “We know so little about the economics of the growing number of UK self-employed

  1. Interesting article. I know of several cases where an individual has set up a business with very modest economic activity in order to receive tax credits. I wonder how much of that increase of 0.8 million in self employed is a result of this kind of planning? The introduction of tax credits roughly correlates with the increase in numbers.

    • Exactly the point I was going to make Charles.

      We need to know the number of people claiming in work benefits.The unemployment rate tells you the square root of naff all these days.

    • Hi Charles and welcome.

      Chris L has made that point on here regularly so you are not alone. Also when I read new articles I look for it or signs of it. But there wasn’t any in the new ONS research.

  2. I like the idea of tearing out the pages of your economics text books which relate to the NAIRU.
    I have a vague feeling that these text books could become pretty thin by the time that you have cut out the useless bits. I would give as examples:
    1. The effects of QE;
    2. The idea that interest rates cannot go below zero;
    3. The reliance on GDP/GNP calculations as accurate and that can be relied upon;
    4. Ditto inflation CPI/RPI etc
    5. Anything to do with forward guidance by central banks;
    6. Anything to do with house prices gradually coming into line with wages;
    7. The idea that interest rates are good ways to control inflation.
    I am sure that your readers will have many more examples. It reminds me of that wonderful Marx Brothers scene when they are gradually cutting down a contract until it is just a scrap of paper…

    • Hi James

      I do not recall the Marx Bothers scene so I will look it up. As to the textbooks they are getting rather thin these days so I hope that students are getting them cheaper! Mind you when I see examples of those being made Professors I do fear for what the students are being taught, they should claim their £9,000 per annum back.

  3. “Analysis also suggests that those moving from employee positions to self-employment tend to have somewhat higher pre-transition hourly earnings…”

    Both of them?

  4. Great article as always Shaun.

    It would be interesting to find out the percentage of part time workers in receipt of tax credits?

    • Hi Anteos and thanks

      We get stuck on the issue of not knowing what the self-employed earn. But we do know that there have been changes overall as the Institute for Fiscal Studies informed us yesterday.

      “middle- income households with children now get 30% of their income from benefits and tax credits, up from 22% 20 years ago.”

  5. so instead of sickness bennies

    they’re on self employed and credits

    so same ol’ , same ol’

    cant be beyond the wit of man to determine tax revenues and NIC from this group – they pay both employee and employer these days

    Forbin

    • Hi Forbin

      I was thinking that myself, that each January we should get a pretty good guide to the state of play in self-employed earnings albeit that they would be lagged.. Furthermore that should give plenty of time to put them in the annual ASHE survey.

      Meanwhile continued good news on the corn front as it is US $3.38 now.

  6. Given the importance of tax credits in getting people off the dole and into the cake making/cleaning/gardening business,I really think the unemployment figures should be treated with an economic health warning unless they’re considered in conjunction with fiscal deficits running alongside them.

    • Hi Dutch

      Agreed and we have been looking at those numbers for clues for a while now. The recent boost to National Insurance rates muddies the waters there but as of the last update. there was a slowing in the growth rate of Income Tax so I will be watching that..

  7. As Friedman said, you can put the unemployed back to work by having half dig holes and the other half fill them in again. It doesn’t produce anything, but everyone is employed. There are people, for whom self-employment is the best way, but most “contractors” are simply victims of “unscrupulous employers” (especially in the financial sector), who use it as a way to avoid contributions and employment law. As a result, productivity is poor – trebles all round at the top.

    This country is screwed – low productivity, low skills and a bunch of clowns in important positions, who think the way to do a job is by sitting on your bum, but really do not have a clue. I am glad i didn’t have kids – I would be telling them to emigrate right now before it gets any worse.

  8. Greetings from the Antipodes Shaun!

    I’ve been absorbing your insightful & entertaining columns for many moons now, & thought that you & your merry band of economic mis-fits would enjoy this topical article from David Hisco, the CEO of the ANZ Bank – the largest bank in NZ – on the ‘State of the Nation’ Down_Under:

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11678081

    “Auckland house prices and the New Zealand dollar are over-cooked. Having been in banking since 1980 I have seen this movie before. The ending is pretty much the same – sometimes a little plot twist, but usually messy…..”

    Best,
    Brendon

    • ‘The Baby Boomers who have become property investors in recent years based on shallow deposits will soon realise what I’m already seeing – more and more rental properties where owners either can’t find a tenant, or the rent can’t cover the mortgage. Salaries and wages have hardly changed whilst house prices have risen – this can’t continue so it’s a matter of when, not if, the market adjusts.’

      Some real home truths in there Brendon,thanks for sharing.

      • I remember that from 2008 and mentioned BBC presenter Konnie Huq moaning about having bought a BtL, which was in a block taking over by a Housing association. Funny thing is that if you look this up now, she owns “several BtL properties” and her sister is an MP. No surprise that may etc. are back-peddling on EU migrants! It is a classic case of supply/demand market rubbing up against an asset market – and every so often it gets seriously out of kilter.

        It is worth noting that KH (who I would think is self-employed like most of this TV people) probably hasn’t been any more productive since 2008, but has gained from BtL. I see also now that councils are getting concerned about private landlords. http://news.sky.com/story/uk-housing-crisis-could-mark-return-of-slums-10507668

        Anyway, enough of my pet bugbear!

  9. Hi Shaun,

    Another excellent blog.

    This article and graph says it all

    https://alternativeeconomics.co/blogline/41775-20-7-16-mckinsey-s-generation-worse

    Since 2005 70% of UK households are worse off in 2016 compared to 2005! Hence people have made things worse by borrowing record amounts of credit, so they still don’t have enough income to live on, plus the increasing interest costs for servicing the loans!

    Most of the self-employed I know have never recovered from a combination of the 2008 depression, mass migration and globalization. For the self-employed no minimum wage exists, it is purely supply and demand. This covers all education and skill levels where work can be sent and received electronically. From bookkeepers, the creation and implementation of marketing plans to graduate graphic artists and computer programmers. They can be sourced globally through many freelancer websites and for safety by both sides they can make and receive payments through escrow accounts. Hot spots are Eastern Europe, Asia, South America and South Africa. Wages can vary from $20/hr to $20 or less per day minus the freelancer website fees and the unpaid hours bidding for work!

    With record savings rates, ZIRP and NIRP, capital item inflation bubbles, investors and entrepreneurs have not got any confidence in where they can invest and turn a profit, so they don’t hence low economic growth. I don’t know how this global problem is going to be fixed, but it need tackling from many different directions and areas as part of the global changes from this 4th generation industrial revolution. The majority are not benefitting from this and hence the rise in anti-establishment political parties with their ‘radical’ solutions.

    • Hi Rods and thanks

      In a way this returns us to central bankers like Andy Haldane and my article of Monday. He thinks along those lines but somehow seems to think that tying yourself in a spiders web of ever lower interest-rates will help. I do not and in fact think it will make it worse.

      Cheers for the link I will take a look.

  10. Hi Shaun, Thanks for highlighting yet another seldom considered subject. I know of many people for whom the aftermath of the financial crisis meant much lower job security and reductions in hours and pay. This environment led people to think about having a go at being their own boss using their redundancy money.
    I don’t know any who say they are better off financially, but the general consensus is their quality of life has improved. Luckily most of my peer group are fortunate to be able to afford this option being ‘boomers’. Life is probably not as rosy for those who find themselves in this situation earlier in their working lives however.

    • Hi Zummerzetman
      Your group does have a link to the ONS research as they fit its conclusions. However as you and others have pointed out we know so little about those with less fortunate finances and circumstances,

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