Enterprise and Small Business Principles

Patterns of self-employment

The rest of this review concentrates upon the empirical patterns of self-employment in a number of key areas. These are:

■ the role of personal characteristics in the determination of employment status;

■ important characteristics of the jobs that the self-employed choose to do; and

■ the flows into and out of self-employment.

A distinctive feature of self-employment is that it involves taking risks which entail the possibility of failure. Once a self-employed person establishes a business, some risks decline, but they never disappear. The penalties of failure vary with the degree of per­sonal commitment, the availability of alternative wage or self-employment, and the extent of a social safety net, but they usually involve high personal cost. An employee may be made redundant but there is often some financial compensation, perhaps guaranteed by the State, and there is a social concern that offers at least nominal encouragement. However, the bankrupt self-employed person (who may not be able to take advantage of any bankruptcy protection) has less of a safety net, and he (and even his family) may be deprived of all financial assets. While the risks are inherent, self-employment would be more attractive if fewer of those who entered were likely to fail. If the standard of entrants were higher the survival rate would be higher. If that is achieved by more rigorous screening rather than an upgrading of human resources, less labour would enter the sector and the government’s programmes for encouraging the sector would be less effective.

The self-employed are concentrated mainly in industries and trades where there are many producers, where entry is relatively easy and competition vigorous. The result­ing crowding can lead to market saturation, and the self-employed often operate close to the margin. When times are difficult (in general, or in their particular trade), they drive themselves and their families harder; when circumstances are easier they reap the benefits. Hakim (1988b) notes that the self-employed exhibit a tendency to increase their hours and effort during tough times rather than cut staff. In better times they then cut hours and effort rather than strive only for financial reward. It is largely a priv­ate question as to how badly or how well they treat themselves in terms of hours and conditions of work. For those with employees the danger is that they will expect the employees to accept the same treatment that they themselves tolerate, or worse. As a consequence, the self-employed are sometimes seen as bad employers. They are con­centrated in service trades where many employees are paid low wages; these wages may be further reduced when the employer’s earnings fall. Employers may also be tempted to extend hours of work and neglect safety conditions and there is little guarantee that in good times the gains of self-employment will be shared with the employees.

In many trades where self-employment is extensive the enterprises are too small for there to be any real likelihood that trade unions can organise the employees. Moreover, where trade unions endeavour to do so, small employers and often their employees as well may resist these efforts. Trade unions tend, therefore, to be suspicious of self­employment. Laws and regulations may not apply or may be difficult to enforce. Employment terms accepted by employees of very small-scale employers may be seen as a threat to the terms which trade unions negotiate in larger firms. Employees in trades where the self-employed are a significant element may find their terms and conditions of work constrained. Their employers may argue that they have to face competition from very small firms and thus cannot afford ‘excessive’ labour costs. Poor employment conditions of employees in some very small firms, although at the margin of an indus­try, may have a wider depressing effect on wages and working conditions. Trade unions may believe that it is the owners of micro enterprises with whom they cannot negoti­ate who weaken their bargaining power in other enterprises where they are organised.