Necessity or choice? What is driving the surge in self-employment?

The UK has had a much-vaunted job-creation record in recent years, in contrast to its continental neighbours. However, over a quarter of all the ‘jobs’ created in the last five years in the UK have been due to self-employment. Between 2010 and 2015 the number of self-employed people in the UK increased by over half a million. Much has been written about this surge in self-employment and the reasons for it. For example, in a recent article, Larry Elliot in the Guardian, citing evidence collected by Professor Ursula Huws from Hertfordshire University, has highlighted the increasing prevalence of so-called ‘crowd working’, in which individuals – usually young people –  bid for bespoke tasks, delivery work, and other types of short-term work, rather than seeking a more traditional, permanent employment contract. One reason for this is argued to be that the latter – a traditional employee/employer relationship formalised through a permanent contract – is in decline. While individuals working in this way are likely to be classed as ‘self-employed’ in statistics, some may not consider their self-employment as representative of what may more traditionally be considered ‘entrepreneurship’. Furthermore, those self-employed in this way are argued to be getting a ‘rotten deal’ (as Larry Elliot puts it), because the benefits are accrued by-and-large by those procuring services, not the individuals (often young individuals) offering their services through these means.

Essentially, to summarise a continuing debate inadequately but not entirely inaccurately, it is argued that one of the factors leading to the surge in self-employment is an increasing casualization of working arrangements, which forces individuals who would otherwise prefer to be employees to become self-employed. What this implies is that in many cases the increase in self-employment stems from necessity rather than being voluntary. Many individuals would, if they could, prefer to have a more traditional employee-employer relationship, but today’s economy simply does not provide sufficient opportunity in this regard – and, to extend the argument somewhat, this is likely to be increasingly the case in the future. This latter extended argument sometimes draws on currently popular themes such as automation and its potential to destroy many jobs currently done by humans. Or on factors such as changes to social security benefits which essentially force individuals to become ‘entrepreneurs’ (i.e. casualized, self-employed labour) whether they like it or not.

However, while numerous commentaries have been written on this subject, what has been less prevalent is the presentation of empirical evidence. One reason for this is the difficulty associated with tracking and measuring self-employment (see previous blog on ‘How many businesses are there in the UK?’). Happily however, because of the increasing importance of self-employment as a category of employment, and in an effort to shed some empirical light on the matter, the UK’s Department for Business, Innovation & Skills (BIS) have undertaken a study on the self-employment phenomenon, via the Labour Force Survey. The evidence put together by BIS allows us to unpack the self-employment phenomenon and, in particular, to begin to say something about the debate on whether the current surge stems from necessity or choice.

According to the BIS research, 6% of sampled self-employed individuals were ‘encouraged’ into self-employment by an employer with whom they previously had a more traditional, long-term employee/employer relationship. This type of practice has elsewhere been termed ‘business de-risking’. It represents businesses shifting the risk of insufficient demand off the business and onto the individual. If there is insufficient demand for a period, the self-employed ‘employed’ individuals simply takes a hit to their income, and the business does not have to pay. It also saves the ‘employing’ business money in relation to pensions, holiday and sickness pay etc. However, surprisingly for those of us who may have considered the surge in self-employment to stem primarily from this sort of behaviour by businesses, BIS’ research suggests that only a small proportion (6%) of the recent increase in self-employment can be accounted for by this type of business behaviour.

However, that does not necessarily tell the whole story. This 6% represents only those who were ‘encouraged’ to become self-employed by a business that previously employed them. There may be many others who are not part of this group who would nevertheless prefer to be an employee, but who cannot secure a more traditional, permanent employee position, because of their declining availability, or some other reason. They may not have been forced into self-employment by a current ‘employer’; they may have, for example, simply been made redundant and subsequently been unable to secure the employee/employer arrangement that they would prefer. These individuals would also be part of a group that may be called the ‘involuntary self-employed’, even though they are not part of the group encouraged into self-employment by a previous employer. The BIS data allows us to say something about this broader ‘involuntary self-employed’ group too. A total of 16% of respondents indicated that a contributing factor to their choice to become self-employed was not being able to get the employee role they want. A somewhat higher figure than the 6% ‘encouraged’ into self-employment by an employer, then, but perhaps still somewhat lower than the discourse of involuntary self-employment as the primary driver of growth in self-employment would imply.

However, that figure may also not tell the whole story because a very large total of 49% of respondents, amounting to the largest category of the self-employed in BIS’ study, responded that the reason for their self-employment is because ‘Being self-employed is normal for the job done’. In other words, for the type of work they do, being self-employed is the standard and there is no other option. Should at least some of the people in this category also be considered to some extent ‘involuntary self-employed’? The reason this could be troubling is that the number of industries in which self-employment is ‘standard’ may be increasing such that for large swathes of the economy self-employment is no longer an option but a requirement. If one wishes to – or has to (i.e. because of geographic location or previous experience) – work in these industries, one must essentially become self-employed by necessity.

In strict terms, an individual in this situation may not consider themselves ‘forced’ into involuntary self-employment because no previous employer has ‘encouraged’ them into becoming self-employed, or because of a lack of availability of more traditional employee/employer relationships (the 16% described above). Essentially, if no such opportunities exist in the industry in question, and if self-employment in that industry is the only option, then a choice between self-employment and employment simply does not exist, rendering the question of which one prefers somewhat meaningless. The lack of availability of permanent employee/employer relationships in the industry in question (as represented by the 16% discussed above) plays no role in the decision, since there are none in that industry.

In many respects, if no such thing as a permanent contract exists in large swathes of the economy it makes no sense to think of self-employment as a necessity or choice. It also makes little sense to talk in terms of the alternative of a ‘traditional’ employee/employer relationship as I have in setting out this argument. If someone asks me whether I prefer chocolate or vanilla ice-cream the choice makes sense to me because I know that there is indeed an option to have one or the other. If someone presents me with vanilla ice-cream as the only option and then, after I take that option, asks me whether I would have preferred a different option, the question makes no sense. I do not consider the absence of chocolate ice-cream to feature in my decision, since this is just an imaginary possibility that does not exist in reality. You can only have a ‘preference’ for something which is a genuine alternative.

So, in sum, this new evidence from BIS is very welcome. Finally, there is some evidence on which to base a discussion with regards to these issues. However, this evidence perhaps fuels the debate on self-employment more than settling it. At the heart of this debate are transformations taking place in the economy which render self-employment the norm, rendering it as difficult to talk of ‘involuntary self-employment’ as it would be to refer to ‘involuntary employment’. Many people might prefer not to have a job, if that were possible; however, for the vast majority of those employed it is not. Yet few of these people, if asked, would consider themselves ‘involuntarily employed’, or would state the unavailability of the option of not having a job as one of the causes of their decision to have one. In other words, if the other option is not a genuinely real one, it does not feature in the decision-making process.

Dr James Derbyshire, CEEDR & Microbusiness Research Portal, Middlesex University

Published on 22nd February 2016

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