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IFS - Lack of job opportunities helps drive record rise in solo self-employment

Self-employment has risen dramatically in the UK. This rise has been entirely driven by ‘solo’ self-employment – sole traders and owner-managers with no employees. By the end of 2019, there were nearly 4 million solo self-employed workers, up from 2.3 million in 2000. The level and growth of solo self-employment in the UK are among the highest in OECD countries.

A new report, part of the IFS Deaton Review of Inequalities funded by the Nuffield Foundation, finds that the solo self-employed are an increasingly disadvantaged group in the labour market and that part of the recent rise in numbers is likely to reflect a lack of opportunities in traditional employment:

  • A quarter of the newly solo self-employed were unemployed immediately before embarking on self-employment, a share which rose sharply following the Great Recession a decade ago. The solo self-employed appear to be an increasingly marginalised group compared with employees. In 2000, they were no more likely to have been recently out of work than employees, but by 2019 they were nearly 1.5 times as likely to have been.
  • The solo self-employed earn less than employees on average and the gap has widened over time. Average (median) pre-tax earnings in 2018–19 were 30% lower than among employees.
  • Many solo self-employed workers are ‘underemployed’, with 12% wanting to work longer hours in 2019, compared with 9% of employees. Again, the gap with employees has widened over time.
  • The more solo self-employment there is in an area, the more employee wages are held down. This suggests that (at least some of) the solo self-employed play a similar role to the unemployed, in providing a ‘reserve army’ of potential employees which reduces the bargaining power of actual employees and hence their wages. Again, this is consistent with solo self-employment being a fall-back option: some solo self-employed would opt for traditional employment if they had the chance. This appears to be as true of those with higher earnings as of those towards the bottom of the distribution.

Xiaowei Xu, a Senior Research Economist at IFS and an author of the report, said:

‘Taken together, the evidence in our report suggests that solo self-employment is often a fall-back option for workers who face bleak prospects in traditional employment. COVID-19 has now made these prospects even worse. It is important to try to find ways of supporting people which recognises that some self-employment is really akin to hidden unemployment, rather than people pursuing appealing business opportunities.’

Mark Franks, Director of Welfare at the Nuffield Foundation, said:

‘The solo self-employed account for a significant and growing share of the UK labour market. While solo self-employment might be a positive choice for some, for many it is an action of last resort that is characterised by low pay, and may also be contributing to lower wages of those in traditional employment. The Deaton Review is playing an important role in enhancing our understanding of self-employment as both a potential contributor to, and consequence of, economic inequality.’

What does the rise of self-employment tell us about the UK labour market?

Original article link: https://www.ifs.org.uk/publications/15181

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