Lack of job opportunities will drive a record rise in solo self-employment in 2021, according to a report published by the Institute of Fiscal Studies.
Many Freelance Informer readers are aware that self-employment has risen dramatically in the UK over the past decade. What many may not know is that it has been entirely driven by ‘solo’ self-employment – sole traders and owner-managers with no employees, according to the report.
By the end of 2019, there were nearly 4 million solo self-employed workers, up from 2.3 million in 2000. The level and growth of solo self-employment in the UK are among the highest in OECD countries.
A new report, part of the IFS Deaton Review of Inequalities funded by the Nuffield Foundation, finds that the solo self-employed are an increasingly “disadvantaged group” in the labour market and that part of the recent rise in numbers is likely to reflect a lack of opportunities in traditional employment.
Public policy must get to the heart of why there has been a lack of traditional job opportunities. One possibility is the preference of employers using a hybrid employment model, embracing permanent staff and freelancers or project-based contractors.
In the same vein, one must question, why so many in the UK have turned their hand to setting up their own business, going freelance or becoming an agency contractor in that same period. Personal circumstances, such as raising a family, living in a rural area, or wanting the freedom to select which projects you work on are also factors that have led to solo self-employment.
What a difference a decade makes
A quarter of the newly solo self-employed was unemployed immediately before embarking on self-employment, a share which rose sharply following the Great Recession a decade ago, reported the researchers.
“The solo self-employed appear to be an increasingly marginalised group compared with employees,” said the report. “In 2000, they were no more likely to have been recently out of work than employees, but by 2019 they were nearly 1.5 times as likely to have been.”
The solo self-employed earn less than employees on average and the gap has widened over time. Average (median) pre-tax earnings in 2018–19 were 30% lower than among employees.
Many solo self-employed workers are ‘underemployed’, with 12% wanting to work longer hours in 2019, compared with 9% of employees. Again, the gap with employees has widened over time.
‘Hidden unemployment’?
“Taken together, the evidence in our report suggests that solo self-employment is often a fall-back option for workers who face bleak prospects in traditional employment,” said Xiaowei Xu, a Senior Research Economist at IFS and an author of the report.
“COVID-19 has now made these prospects even worse. It is important to try to find ways of supporting people which recognises that some self-employment is really akin to hidden unemployment, rather than people pursuing appealing business opportunities,” said Xu.
Xu and Mark Franks, Director of Welfare at the Nuffield Foundation, found during the research that the more solo self-employment there is in an area, the more employee wages are “held down”.
This, they claim, suggests that (at least some of) the solo self-employed play a similar role to the unemployed, in providing a ‘reserve army’ of potential employees which reduces the bargaining power of actual employees and hence their wages.
We are not all doing the same Gig
“The solo self-employed account for a significant and growing share of the UK labour market,” said Franks. “While solo self-employment might be a positive choice for some, for many it is an action of last resort that is characterised by low pay, and may also be contributing to lower wages of those in traditional employment.”
Franks said that The Deaton Review is playing an important role in enhancing our understanding of self-employment as both a potential contributor to and consequence of, economic inequality.
Gig workers in the retail and food delivery segment, alongside those in the hail cab sector, will be on the lower wage spectrum of the solo-self-employed labour force, compared to highly skilled freelancers, such as accountants, business analysts, software engineers, and data modellers. The latter group can justify higher day or project rates, but like all freelancers are never guaranteed work. This is the risk-reward they take, which does not always pan out as they would like, but could equally be advantageous and lead to more work through an existing client or through word of mouth from another.
Some contractor and freelance day rates in the tech and startup scene, such as those for designers, sit at between £250 – £400; the software engineers can demand a day rate of closer to £700, according to Adriano “Adri” Herdman, co-founder of freelance talent consultancy, We are Move (‘Move’) and tech job platform, Just Startup Jobs.
These costs can be high for a startup long-term, so some clients are toying with the idea of using specialists for a set period with the option to hire permanently if that is something the contractor would find interesting, or find a permanent replacement, but with perhaps less experience behind them once the task at hand is up and running.
Therefore, the presumption of lower wages in all sectors for the solo self-employed is arguably generalist and unproven and as such must not be carried out when crafting public tax and employment policies. What must be overarching in labour and tax policy is a fair footing between freelancers and employees so they equally have a chance for gainful employment. When unclear and confusing ‘barriers to entry’ become indoctrinated in policy, such as the off-payroll IR35 scheme, which has already all but excluded freelancers in certain industries, such as banking, then the ‘economic inequality’ starts to show its ugly face.
Pandemic panacea
Herdman said he has seen a shift in some career self-employed contractors changing tactics to avoid falling foul of IR35 and opting, if they have the choice, to become permanent employees of their clients.
But given the uncertainty of the pandemic, they are also looking for a more stable form of employment, he said. That said, applications for certain roles, went through the roof back in March while others lacked applicants.
“Software engineers are not applying and there is a serious shortage of them in the UK. There are not enough software engineers in the country to fill all the jobs,” said Herdman.
Herdman’s Move business works predominately with ‘outside IR35’ contractors and freelancers, those he explains, that have their own equipment, their own limited company, with multiple clients. Their contracts and dealings are direct with Move clients.
Contractor and freelance day rates in the tech and startup scene, such as those for designers, sit at between £250 – £400, the software engineers can demand a day rate of closer to £700, according to Herdman. These costs can be high for a startup long-term, so some of Herdman’s clients are toying with the idea of using specialists for a set period with the option to hire permanently if that is something the contractor would find interesting, or find a permanent replacement, but with perhaps less experience behind them once the task at hand is up and running.
‘Fall-back’ option is a nice one to have
The researchers reported that some of the UK’s solo self-employed would opt for traditional employment if they had the chance. “This appears to be as true of those with higher earnings as of those towards the bottom of the distribution,” said the report. The IFS report also has labelled solo self-employment as a “fall-back option.” But in any market cycle or hiring climate that is a welcome option to have. That is if the government aims to encourage self-employment rather than discourage it with any upcoming tax schemes.
Remote working as the middle ground?
Mass remote working has put a spanner in the works for employers in the past year but has equally proven a lifesaver – for both businesses and stopping the spread of the coronavirus. The greater acceptance of remote working will also shake up the dialogue of labour policy and the predominate rationalisations of going freelance in the first place: work-life balance. But after getting a taste of remote working, many workers may opt for solo self-employment over a full-time office-based working model once lockdown measures ease in late 2021 (let’s hope).
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