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IFS - Moving into solo self-employment reduces income but improves well-being on average

One in nine workers today is solo self-employed – a sole trader with no employees – up from one in eleven in 2008. Solo self-employment accounts for over a quarter of the total increase in employment between the Great Recession and the onset of COVID-19.

A new study, funded by the Joseph Rowntree Foundation, finds that many workers turn to solo self-employment after falling out of traditional employment. For this group, solo self-employment seems to allow them to recover some of their lost earnings, but not all. Three years after starting their own businesses, those who entered solo self-employment after a spell of non-employment report earning nearly £500 (30%) less a month on average than they did before falling out of employment.

Even so, becoming solo self-employed is associated with big increases in job satisfaction and other measures of well-being, which hold (on average) even among groups that may have been ‘pushed’ into self-employment by a lack of employment opportunities.

We focus on workers in their prime working years, aged 25–59. Other key findings include:

  • Median monthly earnings are lower among the solo self-employed than among employees: £1,179 compared with £1,651 in 2018–19. The gap has widened over time, from 21% lower in 2002–03 to 29% lower in 2018–19.
  • More than one in four (27% of) solo self-employed workers were in relative income poverty in 2018–19, after deducting housing costs, compared with one in ten (10% of) employees. The solo self-employed were also more likely to report being materially deprived, though the difference is much smaller.
  • More than 40% of those moving into solo self-employment were unemployed or inactive in the year before starting self-employment. Many report having been dismissed or made redundant from a previous job.
  • Solo self-employment is often a transitory state. 26% leave solo self-employment within one year of entry, and 38% are no longer self-employed three years later. The vast majority (73%) of those who leave solo self-employment move on to traditional employment.
  • Well-being improves markedly upon entering solo self-employment. In particular, job satisfaction rises by 1 point on a 7-point scale, relative to an average score of 4.7 the year before. The improvement in well-being holds on average even among those who fell out of employment in the run-up to entry and among those who did not expect to start their own businesses the year before, who are more likely to have been ‘pushed’ into self-employment.

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

‘Solo self-employment is often a fall-back option for workers hit by employment shocks – an intermediate state between employment and unemployment. As the COVID-19 crisis increases labour market volatility and creates uncertainty over future employment opportunities in certain sectors and occupations, we may see a further rise in solo self-employment. If so, that would be a group worthy of concern and policy attention alongside the potentially large number of unemployed people.'

‘At the same time, our research suggests that becoming solo self-employed often increases well-being, despite leading to lower earnings. We should try to understand the desirable qualities in solo self-employment – freedom, autonomy and authority, for example – and look for ways to foster them in traditional employment relationships.’

Peter Matejic, Head of Evidence at the Joseph Rowntree Foundation said: 

‘Work should be a reliable route out of poverty which allows people to build a better life for themselves and their families. Self-employment can be the best option for many workers, giving them a degree of flexibility and control over their work. However, many workers now seem to be swept into this situation through a lack of good jobs, with this resulting in higher rates of poverty amongst the solo self-employed.'

‘Given the extra volatility which COVID-19 brings to the economy, the effects of this trend need to be monitored closely alongside unemployment and low pay. Self-employment does have an important role in the economy, but it has to be part of delivering good jobs to all parts of the country when it comes to truly levelling up.’

Going solo: how starting solo self-employment affects incomes and well-being

Original article link: https://www.ifs.org.uk/publications/14944

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