IES VIEWPOINT: Towards a more entrepreneurial workforce?

Newsletter articles

1 Feb 2013

Employment Studies Issue 17

Nigel Meager, Director

One feature of recent UK employment which has attracted attention, but has yet to be fully explained is the growth in self-employment. In 2011, it hit a ‘record’ level of four million and politicians have been quick to hail this as a harbinger of David Cameron’s ‘age of the entrepreneur’. Should this trend be seen as a fundamental change of workforce culture towards Dragon’s Denstyle entrepreneurship, helping offset the impact of austerity in the public sector? It’s too early to be sure, but there are good reasons for scepticism.

We’ve been here before, in the 1980s, when a self-employment surge was seen by Margaret Thatcher and others as the vanguard of an ‘enterprise culture’. Between 1984 and 1994, self-employment grew by nearly a million (from 11.4% to 14.0% of total employment). It turned out[1] that it mainly reflected factors such as ‘labour-only’ sub-contracting in the construction sector, contracting-out of service functions in the public and parts of the private sector, and programmes such as the Enterprise Allowance Scheme, subsidising unemployed people to start businesses.

Less heralded was the subsequent fall in self-employment, despite an economic boom. By 2000 it was down to 12.0% of employment, as the Inland Revenue clamped down on bogus self-employment, and subsidised startups from the previous period struggled and failed. Research on self-employed incomes in this period confirmed that many ‘new self-employed’ were not the prosperous entrepreneurial business proprietors of popular image, but were concentrated at the bottom of the earnings distribution, working long hours for low incomes, in marginal easy-to-enter sectors with high rates of business ailure. Many were engaged in cash-in-hand activities including domestic cleaning, childminding and ‘handy-man’ jobs. Similarly, research on self-employment schemes for the unemployed showed poor value for money and little evidence of sustainable impact on the income and employment prospects of participants. None of this is surprising; only a small proportion of the workforce is suited to running a business. The best predictor of success in self-employment is whether you have a self-employed parent: the necessary human and social capital (and often the financial capital) for business start-up is more likely to be possessed by someone brought up in an entrepreneurial culture. While some skills and attitudes can be taught, research suggests[2] there’s some way to go in developing an effective system of enterprise education for the bulk of the UK workforce.

After 2000, self-employment grew again, albeit more slowly than in the 1980s, and has continued growing after the 2008 recession. Should we be more sanguine this time that it represents a deeply-rooted shift to self-reliance and entrepreneurship in the workforce? Not really. As the Business Department itself has noted[3], the most recent surge ‘could be as a result of the tough labour market conditions, which may have encouraged people to set up business as they are made redundant for example’. Evidence does not suggest that businesses formed in such circumstances have good survival prospects. As the CIPD[4] highlighted, ‘It’s far from clear that the recent rise in self-employment marks a resurgence in British enterprise culture, with many of those taking the self-employed route back to work looking more like an army of part-time ‘oddjobbers’ desperate to avoid unemployment.’ Indeed, increased part-time self-employment is an unusual feature of the recent recession. Traditionally the self-employed work longer hours than employees. This is still true but, as ONS notes[5], most of the 2008-2011 self-employment growth involved part-timers. A further concern is raised by the most recent ONS evidence on average earnings, showing a very sharp recent decline in median self-employed earnings, which ‘… may reflect underlying changes following the recession, such as increases in the numbers of self-employed people which have not been matched by increases in the amount of work available, resulting in rising underemployment rates among the self-employed’.[6]

Age is also a factor; historically, middle-aged and older people are more likely to enter self-employment than youngsters, and their businesses are more likely to survive than those set up by young people. Again this isn’t surprising: they’re more likely to have acquired the human and financial capital which stands them in good stead in a business start-up. Nevertheless, these facts are somewhat out of kilter with the popular stereotype of self-employment growth driven by a cohort of dynamic young entrepreneurs. If anything, the age bias is more entrenched in recent years: 84% of the increase in self-employment since 2008 has been among the over-50s, and a significant proportion involves the over-65s[7]. While this partly reflects a positive trend of older workers continuing to participate in work via self-employment, it’s likely that the shrinking value of pension pots since the financial crisis is also relevant, with people staying in work because they can’t afford to retire. The concentration of new self-employment amongst this older cohort also raises questions about whether it fosters a longer-term shift towards enterprise within the overall workforce; for this to happen we’d need to see a change in orientation of a similar scale among younger workers.

So, the jury’s out, but the recent growth in self-employment looks more like an immediate response to current economic difficulties, than part of the longer-term solution to them.

Footnotes [back]

[1] The evidence from this period is summarised, along with more recent work, in a 2011 IES study for UKCES: http://www.ukces.org.uk/publications/er31-skills-for-self-employment

[2] IES (2011), op. cit.

[3] Department for Business, Innovation and Skills: 17 October 2012. Statistical Release: Business Population Estimates for the UK and Regions 2012

[4] Chartered Institute of Personnel and Development: January 2012. Work Audit: The Rise in Self-employment

[5] Office for National Statistics, Self-employed workers in the UK, February 2013

[6] Office for National Statistics, Changes in real earnings in the UK and London, 2002 to 2012, February 2013.

[7] Op. cit.