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The Business Population Estimates need a more practical way of accounting for self-employment

Self-employment and the fuzzy border between what is work and what is enterprise is back in the news, and the trend looks set for the quantity of these type of stories to grow. Over the past week, the big news story has been the industrial action taken by Deliveroo couriers in central London over new contractual terms.

It is important to note that Deliveroo couriers are self-employed, so from the perspective of enterprise research, we would expect to see these couriers in the Business Population Estimates in the field for ‘enterprise with no employees’. The couriers would be incorporated into this estimate because of the way the BPE methodology uses HMRC’s self-assessment count. However, the newly monikered Department for Business, Energy and Industrial Strategy (BEIS) — formerly known as BIS— released a statement in response to the Deliveroo strike saying ‘An individual’s employment status is determined by the reality of the working relationship and not the type of contract they have signed’.

This introduces an aspect of uncertainty to the Business Population Estimates (BPE), compiled by BEIS and the source for a wide number of claims about ‘entrepreneurial Britain’. Unsurprisingly, the BPE does not have a methodological approach to understanding ‘the reality of the working relationship’ for self-employed people. As was identified in an early blog post on How many business are there in the UK? the estimate simply uses a combination of the Labour Force Survey and HMRC’s self-assessment data as a proxy of entreprenualiasm. The theme of self-employment and its relationship is also considered in posts on Self-employment: The missing piece of the puzzle and Are the new self-employed ‘reluctant entrepreneurs’?

Increasingly the ‘gig economy’ and the changing business models being driven by the ‘platform economy’ are seeing an increasing use of self-employment contracts in what might have previously been considered employment-type relationships. It should be important then for researchers — looking at either the stock of entrepreneurs or the labour market — to be cognisant of the self-employed component in the BPE and to make necessary adjustments to the estimate accordingly. It is becoming increasingly clear that the proxy is over estimating the levels of entrepreneurialism in Britain.

While it’s easy to accommodate this in footnotes to caveat a piece of research, as we have seen in media coverage of the entire BPE, such nuance does not get reported. It is likely then that research that uses the full estimates is getting cited/quoted in other work and the nuance being stripped from reporting. We need a more practical solution that can be applied to the BPE to help with disaggregating microbusiness from the Non-Entrepreneurial Self-Employed component (NESE).

The initial inspiration for this blog was to explore the case for a coefficient that could be applied to the BPE to adjust for the NESE, however in thrashing out the preamble I realised this may be a little too ambitious a project for a blog post and, perhaps more importantly, that the data may not be available to construct it.

There are some obvious challenges such as accounting for regional and sectoral differences which would require some differentiation — possibly estimating the coefficient through a time-based shift-share analysis — or perhaps doing some new research using HMRC’s datalab, especially the self-assessment dataset, to identify other ways to estimate the NESE component, or looking at other survey data that are available to the research community.

It’s probable there isn’t a usable mathematical solution to this problem working with exiting data. However, exploring it in more depth should definitely add some value to the policy question. This might lead us to request more data, although I know there is general reluctance to add administrative burden in this area. It’s possible that a one-off sample based survey may yeild more information than currently exists. There’s much to be considered.

It may also be a case of reconsidering the tax rules in this regard — and this research investigation could contribute to this process. I was reminded of the issue that HMRC had in the early 2000s with IR35 Contractor status. Many contractors in professional services such as IT were leaving employment, establishing a Ltd company and re-engaging with their former employer as an enterprise. This produced a spike in the enterprise statistics as people took advantage of shifting income away from PAYE and towards dividends. In the end, HMRC had to issue an amendment to the rules and this eventually stabilised the statistics.

What is clear is that there does remain a need for a practical measure to keep BPE as a statistical product that is fit-for-purpose. It seems to be a research area that has some policy priority.

Garry Haywood, Microbusiness Research Portal advisory board

Are the new self-employed ‘reluctant entrepreneurs’?

With the recent rise in self-employment, there is a general assumption among commentators that a sizeable chunk of Britain’s new self-employed are ‘reluctant entrepreneurs’, forced into working for themselves by ruthless employers who wish to cut the cost of labour, and hoping to escape back to full-time employment as soon as possible (see for example, the Social Market Foundation’s recent report ‘Tough Gig: Tough gig: Low paid self-employment in London and the UK’).

In another blog on this site (February 2016), James Derbyshire noted that ‘while numerous commentaries have been written on this subject, what has been less prevalent is the presentation of empirical evidence’. That statement prompted me to check what newly self-employed have being telling interviewers in the annual Global Entrepreneurship Monitor (GEM) survey about their employment preferences. Each year since 2012, GEM has asked around 8,000 interviewees aged between 18 and 64 in the UK the following question: ‘As a long-term option, would you prefer to run your own business or be employed by others?’. Their answers are very revealing, and paint a much more positive picture than the commentators would suggest.

First, it is necessary to be very precise about what we mean by ‘self-employed’ and ‘entrepreneur’, as these terms are used interchangeably, and are often left undefined, even by official surveys (the Labour Force Survey, for example, asks people to decide if they are self-employed or an employee, but does not define this). I define solo-entrepreneurs as those who are sole business owners and intend to employ others in the future, but currently employ no one else. I see these people as qualitatively different from solo business self-employed: those sole business owners who don’t intend to employ others in the medium term at least. By asking those who are running their own business how many people they employ now and how many they expect to employ in 5 years’ time, GEM can differentiate solo-entrepreneurs from solo business self-employed. Note that I distinguish between business self-employed and non-business self-employed – more on that later.

By differentiating new from established solo entrepreneurs and solo business self-employed, we can see if there is any difference between new entrants (which GEM defines as being in business for less than 42 months) and those who have been running the same business for longer than that. Since some business owner-managers have several businesses at various stages of development, it makes sense to categorise these people by their most established level of business ownership. Then, we can compare them to people who share business ownership with others. Finally, to answer the question properly, we need to focus in on those who are running the business as their main source of income and exclude those who are running it as a side-line. The GEM samples are randomly sampled within each region and then weighted by age, gender, ethnicity and region to ensure they are representative of the UK.

Chart 1 below shows the percentage of new business owner-managers of different types who would prefer to run their own business or be employed by others. The results suggest that the vast majority of solo and team business self-employed and solo and team entrepreneurs would prefer to run their own business (the solid lines in the chart); for the business self-employed we see a clear increase over time in the percentage preferring to run their own business and a reduction in the percentage preferring to be employed by others (dashed lines), while for entrepreneurs there is no strong trend over time, with around 90% preferring to be running their own business in the next five years. The proportion who don’t care either way is very small.

Chart 1: Percentage of new owner-managers whose business is their main source of income stating their long-term preference for running their own business (solid line) versus being employed by others (dashed line), 2012 to 2015Chart 1Source: Global Entrepreneurship Monitor UK database

For established business owner managers, the preference for running their own business is, if anything, higher, with no apparent trend over time.

Chart 2: Perc. of established owner-managers whose business is their main source of income stating their long-term preference for running their own business (solid line) versus being employed by others (dashed line), 2012 to 2015Chart 2Source: Global Entrepreneurship Monitor UK database

So, for people self-identifying as business owner-managers, there is no suggestion of a rise in ‘reluctant entrepreneurs’ over the past four years – indeed, the opposite seems to be the case for business self-employed.

One question remains, however. Do all individuals who are self-employed see themselves as running a business? The GEM data suggests that the answer is no. In the GEM surveys, a growing proportion (now over 5%) of the working age population classify themselves as self-employed but do not see themselves as running their own business. By comparison, after peaking in 2012, the proportion of business owner-managers (whether they consider themselves as self-employed or not) appears to have declined to around 8% of the working age population. Chart 3 shows the distribution of those who classify themselves as 1) self-employed but not running a business, 2) self-employed and running their own business (a quarter of whom are technically employees of their own company, not self-employed) and 3) business owner-managers who do not self-classify as self-employed. Chart 4 shows that the proportion of each group who would prefer to run their own business in the long term rather than be employed by others. Not surprisingly, the proportion of self-classified self-employed who do not see themselves as running their own business who would prefer to run their own business as a long term option is lower at around 70% than the self-employed who do see themselves as running their own business (around 90%).

Chart 3: Prop. of people aged 18 to 64 who consider themselves self-employed but not running their own business, self-employed and running their own business, and not self-employed but running their own business, 2012 to 2015Chart 3

Source: Global Entrepreneurship Monitor UK database

Chart 4 Percentage of self-employed or running their own business as their main source of income stating their long-term preference for running their own businessChart 4Source: Global Entrepreneurship Monitor UK database

In conclusion, a large minority of people who self-classify themselves as self-employed do not see themselves as running a business, even though technically, they are, by selling the fruit of their own labour. Around 20% of these, or perhaps 1% of the working age population, would rather be employed by others. As for those who do see themselves as running their own business, at most 10% and in the latest survey almost none of them would rather be employed by someone else. Let’s be generous and say these reluctant entrepreneurs and business self-employed together constitute another 1% of the working age population. Whatever way you cut it, it’s not a lot of people.

Consider this for an alternative view of the world of work: 60 per cent of UK employees are not happy in their current roles, according to Investors in People. Now this is a truly shocking statistic. Rather than shining a spotlight of social outrage on the elusive ‘reluctant entrepreneur’, social commentators should instead be asking why so many employees are dissatisfied. I can give them one reason: according to the GEM 2015 survey, 30% of full-time and 26% of part-time employees would rather be…running their own business.

Jonathan Levie – Hunter Centre for Entrepreneurship, University of Strathclyde and UK Enterprise Research Centre; co-director of Global Entrepreneurship Monitor UK

 

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