We are living through a golden age of near full employment according to the Department of Work and Pensions and the Office of National Statistics.
Despite a slow growing economy and low levels of business investment unemployment is back to levels not seen since the 1970s.
I have mixed views about this. I do think that there are lots of good things about the UK labour market. The combination of the National Minimum Wage, Tax Credits, and increased workplace protections have made the labour market more flexible, drawing in more workers. That flexibility has benefitted employers, who have hired more people.
But there is something going on that makes me sceptical. I remember what 1970s full employment was like and this isn’t it.
Some of this scepticism is because I think that the Labour Force Survey isn’t really up to the job of measuring unemployment in a complex labour market with high levels of self employment, zero hours contracts and part time working.
This was one of the first blogs I ever wrote:
https://jon-chadwick.com/2017/03/18/unemployments-rising-in-the-chigley-end-of-town/
While employment has been rising, so has the number of companies. The number of new businesses created in the UK between 2007–08 and 2015–16 grew from 3.4m to 5.6m, higher than in any other OECD country, The number of businesses with employees grew much slowly than the number of sole traders. The number of employees grew by 15%, while self-employment (including those operating as a sole trader or as a partner in a partnership) grew by 25%..
We can see the same effect more dramatically by comparing the growth of companies with employees and the growth of companies without employees:
The growth in business ownership is driven entirely by sole traders, and the number of foreign-born sole traders more than doubled between 2007–08 and 2013–14, accounting for one-third of net growth in the sole trader population over that period. There increase accelerates after the credit crunch.
There are some other things that we know about sole traders.
Sole traders on the whole have very low incomes. The mean annual taxable income (from all sources) of sole traders was £21,000 in 2015–16 (£10,000 below that of employees) median income was just £13,000, with 36% (1.5 million people) earning below £10,000. The income sole traders derive from their business (profit) is even lower on average (£12,100) and has fallen by £3,300 (21%) in real terms since 2007–08
There is also a very high turnover of business start up and closure. Between 2014–15 and 2015–16, the sole trader number of sole trader businesses grew by almost 70,000, but this was 650,000 start ups and 580,000 closures, with sole traders moving in and out of business ownership.
20% of newly set-up sole traders are not trading after their first year; 60% have ceased trading by year 5 and 80% have ceased after 12 years.
The growth in sole trader self employment co-incides with the long term decline in UK productivity since the credit crunch, a trend that has got worse since the Brexit vote. Business investment is low, productivity growth is low, wages are low, self employment is high
The UK definitely has a “long tail” of unproductive companies, much longer than Germany and France. The Bank of England regularly identifies the long tail as the main reason for UK’s poor record on productivity
Sole trader businesses typically are low profit/low investment businesses. 1 million sole traders (23% of the total) had total business costs below £1,000 in 2015–16, 2 million had business costs below £10,000. 300,000 had no business costs at all. Low investment, low productivity, low profit.
It could be that low interests and a willingness to live on very low wages, supplemented by tax credits, has allowed “zombie” businesses which make no money to survive, unproductive.
It is also possible that productivity is a misleading measure – craft products. If all of the sole traders were running artisanal bakerys, making craft gin or small batch cheeses then productivity would be falling but only because that is what customers want. But this doesn’t match with the low investment, low profit model.
The final thing we know is that the typical sole trader is an older man. Some of these are white collar workers laid off in the credit crunch who have returned to their previous industries as self employed consultants. Others are people forced into fake self employment in the gig economy by employers trying to circumvent the National Minimum Wage.
But some of this is however is the result of the Department of Work and Pensions encouraging people into fake self employment.
For someone who has paid their stamp you are entitled to 6 months of Job Seekers Allowance. JSA is a non-means tested benefit worth £73.10 a week. Once the 6 months are over JSA ends, and instead you go onto Income Support, a means tested benefit. For people with savings or a redundancy payment Income Support pays no money, but you are still required to go through the hassle of regular interviews and job applications.
Job Centre Plus has any easy solution for people in this conundrum. Register a business with Companies House and sign up for New Enterprise Allowance Scheme. NEAS pays a non-means tested benefit worth £1,274 over 26 weeks, just for completing a business plan. This puts you back onto benefits, and gets rid of the hassle of interviews and job applications.
After Ian Duncan Smith made such a big fuss over closing apparent benefit loopholes it is rather suspicious that this one was allowed to remain open, particularly as it has the effect of reducing unemployment.
What’s even more suspicious is that since 2010 the number of companies struck off the register by companies house has acce
OK. It’s not really suspicious. It’s a deliberate manipulation of unemployment statistics.
https://www.ft.com/content/b6513260-b5b2-11e7-a398-73d59db9e399
https://researchbriefings.files.parliament.uk/documents/SN06152/SN06152.pdf