Self-employment: The missing piece of the puzzle

The National Living Wage came into force this month, meaning that employees aged 25 or over need to be paid at least £7.20 an hour. The move is part of the Government’s strategy to turn the UK into a high productivity, high pay economy. But any worker that is self-employed would not have received a pay rise. In the SMF’s report, Tough gig: Low paid self-employment in London and the UK, we estimate that 1.7 million workers will continue to be paid below the National Living Wage this year because it does not cover the self-employed.

There is an increasingly sharp divide between low-paid employees and the low-paid self-employed. The latter have received relatively little attention from policy-makers or researchers. Our research finds that low pay is much more common among the self-employed – standing at around 49% against 22% among employees. Furthermore, perhaps contrary to popular perception, the low-paid self-employed are less likely than their low-paid employee counterparts to have other sources of income to rely on, such as income from a partner, or from savings and investments.

The SMF’s research finds that around five sectors that account for 64% of the UK’s low-paid self-employed, and around 73% of London’s self-employed. They are:

  1. Construction, which includes building site work, electricals and plumbing, decoration and roofing.
  2. Administrative and support activities, which includes a range of different types of activities, but our analysis shows that that the most common sub-component for the low-paid self-employed is services to buildings & landscape activities, such as cleaning and gardening.
  3. Transport & storage, of which the most important for the low-paid self-employed are “land transport”, most likely taxi, lorry or coach drivers.
  4. Professional, scientific and technical, where many of the low-paid self-employed are concentrated in design, photography and translation services.
  5. Wholesale and retail trade, with the majority of low-paid self-employed in retail trade

Low pay among the self-employed poses a challenge for policymakers, and this challenge is potentially exacerbated by the introduction of the National Living Wage. Effectively, with the National Living Wage acting as a floor for employees, there is a risk that low pay continues to exist, but largely invisible, through self-employment. Further, the self-employed are not entitled to the same rights as employees, such as holiday and sick pay. There are also different tax implications: elements of National Insurance do not apply to the self-employed.

This means that this is not simply an issue of an excluded and ignored group living in greater relative poverty. The divide in the way in which Government treats employees and the self-employed is making it artificially cheaper for firms to move to a model of firm-contractor, and away from the employer-employee model of working. This accelerates changes that are already underway due to technological advances. Over time, policy designed for a world of employee-employer relationships risks become less and less effective.

The next stage of our research is to explore how the low-paid self-employed can be helped to move into higher pay, and will be published later this year.

Nida Broughton, Chief Economist, Social Market Foundation

Published on 12th April 2016

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