Whether they are a growing underclass or a sign of the UK economy’s bright future, the growing army of self-employed warrant our attention.

Whether they are a growing underclass or a sign of the UK economy’s bright future, the growing army of self-employed warrant our attention

The UK workforce has expanded rapidly over the last year, with the working-age employment rate reaching historically high levels and net job creation of over 900,000 in the year to April 2014.

This is likely to continue in the near term. But most would agree that there are still some reasons to be concerned about the state of working Britain, pointing towards the poor performance of real wages over the last half decade, a squeeze on living standards unprecedented in modern Britain.

But there is also an important debate around self-employment, which has proven to be a key driver of overall job creation while also perplexing policy makers and commentators as to its causes and consequences.

When compared to other European countries, the growth in self-employment in the UK is remarkable. Between the first quarters of 2013 and 2014, the number of self-employed workers rose by 8 per cent, faster than any other Western European economy (see chart).

Looked at as a share of overall employment it presents a similar picture, with the proportion of workers who are self-employed rising by almost a percentage point in a single year, again among the fastest in Europe.

The UK, a country that for many years had internationally low levels of self-employment, has caught up with the EU average and, if current growth continues, will look more like the Southern and Eastern European country which tend to have much larger shares of self-employed workers.

The government’s response to the rise in self-employment has been to praise the UK’s newfound entrepreneurial zeal, while increasingly promoting self-employment as an option to job-seekers. Around 2,000 people a month are moving off benefits into their own business.

Some have seen it as a negative development, having legitimate concerns whether a lot of the new self-employed are actually employees by another name. The TUC, for instance, see the shift towards self-employment as a sign of growing labour market insecurity.

This has been reinforced by evidence that the incomes of this group have taken a dive over the last half decade. The Resolution Foundation estimate that, were the self-employed included in traditional measures of incomes, the fall in earnings observed since the recession could be almost a third larger than previously thought.

While the government would dismiss such a suggestion, it is clearly being taken into account by policymakers; the Monetary Policy Committee of the Bank of England, while divided on the issue, see the rise in self-employment as a sign that the labour market may be weaker than it appears.

Others make a slightly more nuanced point. The self-employed come in many flavours, as the RSA argues. It is true that some are the government’s fabled entrepreneurs, driven by high-growth ambitions, innovation and disruptive business models, but many are one-man bands simply looking to get by or small businesses happy to stay at their current level.

The UK is just as much a nation of shopkeepers as a vanguard of cutting-edge capitalism. And the growth in self-employment may be linked to the former group as much as the latter. As Chris Giles points out, many older self-employed workers are simply working longer, due to a combination of rises in the pension age and recession-induced falls in the value of wealth stored up for retirement.

Taking this view, the rise in overall self-employment may be caused by a fall in the numbers leaving the group, rather than an increase in the number joining.

Looking forward, what is key is whether recent trends in the labour market are a blip or something deeper. It could be the case that we are just working through some post-recession quirks in the jobs market, and the structure of employment will return to normal in due course.

If, on the other hand, technological and cultural changes are making it easier than ever before to run your own business, then policymakers and other actors will need to accommodate this shift. The USA, for instance, has seen the creation of a freelancers union, which offers members many of the benefits that are traditionally associated with regular employment.

Whether they are a growing underclass or a sign of the UK economy’s bright future, the self-employed definitely warrant our attention.

Spencer Thompson is senior economic analyst at IPPR

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