Enterprise and Small Business Principles

The self-employed

Detailed and comprehensive analysis of the self-employed received very little attention from the economics profession prior to the 1980s. Set against a background of declin­ing numbers stemming from the days of the industrial revolution this is hardly surpris­ing. However, during that decade something new happened to self-employment in the UK: the numbers of self-employed rose by approximately 60% to 3.4 million, forming almost 13% of the workforce. This dramatic rise has caused a well-deserved resurgence of interest. The increases in self-employment in the 1980s and the subsequent fall dur­ing the recession at the start of the 1990s have given rise to a lively debate about the types of people tempted to give self-employment a try.

The first part of this chapter presents the data on these people and will allow you to link themes and trends to the rest of the text. Research undertaken by Meager et al. (1996) studied the income distribution of the self-employed - both male and female. (Other authors have also added interesting material to this debate including Jenkins (1994) and Parker (1997, 2004).) On average, over all the self-employed, they earn as much as wage earners but there is a significant dispersion with one group of very high earners at one end of the spectrum (usually male) while at the other end there exists a large and growing group of poor self-employed. To elaborate, a self-employed person has more than three times the chance of falling into the bottom 10% of the income distribution than a comparable type of employee (i. e. earning approximately £40-£50 per week).

Meager et al. also comment that self-employment, even if it forms only part of a work­ing career, can put peoples’ future financial security at risk. If a person has a ‘punctu­ated’ work history with periods of employment, unemployment and self-employment, then they are more likely to be pushed into the poorer group of self-employed workers in later life because they are less likely to have a stable occupational pension and less likely to have a significant volume of savings. This in turn implies a greater dependency upon the state pension in later life. The increased heterogeneity of the self-employed population means that those at the bottom end of the earnings spectrum cannot expect things to improve dramatically over the next few years.

There is no automatic link between self-employment and poverty, although equally there is no such link between self-employment and success. Storey (1994) believes that it is important for the self-employed to have a realistic understanding of what they are undertaking. He has discovered instances where people have entered self-employment and then run up considerable personal debt. They survive in business only by working very long hours at low rates of pay (although in some cases this provides them not only with employment, but a certain status within society).

If self-employment risks leading to debt and poverty, then why are so many people choosing it? Anecdotal evidence suggests that some of the new self-employed have been actively forced into it by their companies. Citizens’ Advice Bureaux across the country have noticed that for the last five or six years an increasing number of people are coming to them with problems associated with self-employment. One major prob­lem is that self-employment status has been imposed upon them. Employers see the advantages, in a short-term sense, of having a self-employed workforce. The rights of these people are then adversely affected by this when the company is no longer liable for pension contributions and employer’s National Insurance Contributions (NICs). It is hard to determine how many of these types of people there are among the total self­employed, but such reluctant entrepreneurs should be kept in mind.

A larger group who have entered self-employment are those who were previously unemployed. The encouragement of the unemployed to become their own bosses has been a constant of government policy since the early 1980s. There has been a succes­sion of initiatives: the Enterprise Allowance Scheme (EAS), the Business Start-Up scheme and the Enterprise Support Programme. These schemes all require a moderate amount of capital to be injected prior to registration and often banks are reluctant to lend to people who have previously been unemployed. Lack of capital or assets to act as col­lateral is a major problem which has been well studied. Research by Black, De Meza and Jeffreys (1996), for example, has shown that house price inflation and financial liberalisation in the 1980s permitted people to borrow and start up on their own far more easily than was previously and is now the case. The illiquid wealth stored in houses could be freed as a result of this financial liberalisation. A deliberate focus of government policy was, therefore, to allow people the chance of entrepreneurship after years of being stuck with few liquid funds. Robson (1996a) has thrown some doubt on the role played by housing collateral in his informative study of business start-ups, although his later paper did indicate a positive relationship between regional house prices and regional rates of self-employment activity (Robson, 1998). The different results make this an interesting area for future work.

Meager et al. (1996) have also undertaken research that has convinced the authors that the necessary attributes for success in self-employment cannot easily be inculcated by training. They believe that entrepreneurs are more likely to be born with these attri­butes and one of the best predictors of someone becoming self-employed and succeeding is whether either or both of their parents have been self-employed.

The sorts of people who come from a family tradition of self-employment (a small business culture where the things that are necessary to succeed like knowledge of con­tracts and the need to save in the form of a pension for old age) are more likely to stay in business. However, a picture is also emerging of many people entering from other backgrounds. Many have been employees all their lives, as have their parents, and after redundancy they set up on their own but are less likely to have the skills and attributes which are a good predictor of success. This is likely to be one of the explanations of why these people fall disproportionately into the low-income sector of the self-employed.

Storey (1994) takes the analysis further by emphasising that self-employment for the unemployed (including those made redundant) is no guarantee of an entrepreneurial society. There is a notion that if somehow the unemployed can be transformed into self­employed this has a number of advantages. The first is that the people are no longer registered as unemployed and, second, some additional output must be created. In real­ity, however, the unemployed enter the easy to enter industries (e. g. window cleaning, hairdressing or vehicle repairing) and displace people already there. These people enter unemployment with possible adverse social consequences for themselves. There is a circularity of moving from self-employment into unemployment and back again, not having an impact upon aggregate employment or on wealth creation.

The numbers of those becoming self-employed is rising again after levelling off at the depths of the recession in the early 1990s. However, the new evidence suggests that a significant number of these people will be reluctant entrepreneurs. Without prospects of a secure job people are forced to give self-employment a try.