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

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

 

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

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

How many businesses are there in the UK?

The Business Population Estimates for the UK & Regions (BPE), published by the UK’s Department of Business, Innovation & Skills (BIS), are currently receiving increasing attention from the enterprise research community. The BPE is the principal official source of statistics on business population and includes an estimate of businesses which are not registered for VAT of PAYE, along with a count of those that are. The former, which includes non-registered businesses, is increasingly important because of the rapid increase in unregistered business numbers in the UK.

In the past, data based solely on ONS’s Inter-Departmental Business Register (IDBR) were the key source used to understand changes in the business stock. However, these data were limited because they only included businesses that were registered for VAT and/or were operating a Pay As You Earn (PAYE) scheme. Businesses that had no employees, or where their turnover was less than the VAT threshold – which is the level of turnover at which a business is compelled to register for VAT and currently stands at £82k per year – were not included. As most academic researchers, and others operating in the realm of enterprise research, are aware, it can take businesses many years to reach the VAT threshold or take on employees, and many, or even most, never do.

Consequently, using VAT and PAYE based statistics misses a critical – and growing – number of businesses. Ultimately this leads to a serious underestimate in the number of businesses, a probable shortfall of several million undetected businesses. Essentially, using VAT and PAYE records, the number of businesses that go undetected is larger than those that actually are detected and counted. Obviously, this is unsatisfactory. However, the question is, how large exactly is this shortfall? In other words, what is the likely total number of businesses in existence?

Producing an accurate estimate of this total is complicated, but also rendered increasingly important as other evidence demonstrates increasing numbers of micro-businesses engaging in economy activity. Consequently, BPE has become an important tool to help the research community respond effectively to the changing composition of the business stock.

One of the main motivations for establishing the Microbusiness Research Portal is to identify and understand key issues relating to these changes. In this post, the first of a series exploring the BPE, we want to examine the composition of the estimate and draw on some important nuances that researchers and practitioners should consider in using this dataset.

Over the past three years it has been widely quoted that there are 5 million businesses operating in the UK. The claim is directly sourced from recent editions of the BPE. Since October 2015, the current estimate is 5.4 million businesses. Yet it is worth noting more than 3 million of these businesses are not registered for VAT or PAYE.

Since the estimate was first published in 2011 there have been more than 500,000 new unregistered businesses added to the stock accounting for 70% of the total increase over that time. So we can see that having these data available is important as it captures a significant component of change, but to what extent is this new figure of 5.4m more accurate? Are all of these 3 million non-registered businesses really businesses? And is this solely representative of new entrepreneurship in the UK, or are there other economic factors that might be affecting this estimate?

Let us consider how the BPE arrives at this estimate of 3 million businesses. BPE uses the Labour Force Survey (LFS) estimate of 4.28 million self-employment jobs, less 0.99m that are either registered for VAT or PAYE and, therefore, already accounted for in the IDBR. Then, using HMRC self-assessment tax return data, the remaining 3.3 million is allocated into 0.2 million partnerships (of 2.33 self-employed persons per partnership) operating under the VAT threshold and 2.8 million self-employed sole traders giving us 3 million businesses.

Increasingly self-employment is occurring in relation to roles which were previously undertaken by employees of companies. Among these are, for example, delivery drivers who may have previously worked for a parcel company, but who now work as a self-employed person for that same company, which supplies them with piecemeal delivery work, thereby reducing risks and costs for the company. Essentially, if there is little demand then the self-employed ‘employee’ takes a hit to his/her income and the ‘employing’ business does not lose money, thereby shifting the risk away from the company and onto the individual. In this respect the coordination of the driver’s activity looks more like that of an employee, yet their exposure to the market is more like that of an entrepreneur.

Business models in many sectors in today’s economy operate in this way. Currently, such situations count as self-employment and come under the category of ‘entrepreneurship’ even though many – perhaps even the individual delivery driver themselves – would not consider it as such. This type of trend means that the total number of ‘businesses’, including self-employed ‘entrepreneurs’ of this type, is rapidly increasing, rendering accurate estimation increasingly difficult but increasingly important.

In addition, 0.5 million of the self-employed in the LFS estimate have self-employment as a first job and self-employment as second job. So, both of these count towards the estimate. A further number of ‘businesses’ consist of those who have a second self-employed ‘job’, but whose main job is as an employee. While these are indeed all individual businesses, the economic activity of those working in these self-employed businesses is not being applied full-time, since they are businesses run in addition to traditional employment; yet, that is what might be inferred from an uncritical assessment of the 3 million firms. So there are many complexities associated with knowing how many businesses there actually are in total, and these estimates should not be taken uncritically.

These issues are of obvious importance for researchers. Some of the key research questions today, regarding such important topics as innovation, competition and productivity depend on knowing whether entrepreneurship and a broader business population is beneficial or detrimental. Answering these questions requires an accurate estimate of both the total number and the composition of businesses. While BPE has provided welcome initial insight into the numbers of unregistered micro-business in the economy, it still requires some careful interpretation.

Over the coming years, those of us who have contributed to establishing this Microbusiness Research Portal intend to explore these issues further, and in detail. We hope we can count on your interest and support in helping us to do so, as we feel that important insights into the nature of our modern economy, of use to both government and researchers, will be forthcoming.

Garry Haywood – Market Evaluator & Advisory Board Member
James Derbyshire – CEEDR, Middlesex University & Microbusiness Research Portal

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