Blog

24 June 2014

Self-employed workers are poorer but happier

With research finding that self-employed workers' earnings are lower than employees, we look at why more people are still becoming self-employed.

Recent research has cast more doubt on the role self-employment has in aiding the UK’s economic recovery. According to the Resolution Foundation's survey, most self-employed workers do not think of themselves as entrepreneurs, don’t employ staff and many earn significantly less than their employed counterparts.

Are self-employed workers worse off?

Analysis from the Resolution Foundation’s research on self-employed people found that:

  • Their earnings are 20% lower than they were in 2006/7, with the most noticeable drop in earnings among workers aged 35 to 50 (26%). This is a stark contrast to employees, whose income is 6% lower for the same period. They worked out that this means the average self-employed person earns 40% less than a typical employed person.
  • 28% of the overall growth in self-employment can be attributed to less people leaving self-employment.
  • While only 27% work for themselves because they didn’t have a better option, this is a substantial increase from before the recession, when the figure was 10%. Regionally, areas like the East of England with a higher unemployment rate have had a corresponding increase in self-employment levels.
  • Only 34% would call themselves entrepreneurs.
  • Most are one-man bands. In 2005 only 23% employed other staff and this had reduced to 17% by 2013. Therefore, most business owners aren’t boosting the jobs market.
  • Only 30% are contributing to a pension, compared to 51% of employees.

Salary discrepancies

Data from the HMRC indicates that earnings have been declining for self-employed workers since the millennium. However, According to Tax Research LLP, it’s possible that this data is being skewed by people who are employed but also register themselves as self-employed.  It stated that around 1 million people who registered as self-employed between 1999 and 2011 earned less than £2,000 each year. 

Of course, on the other end of the spectrum, there are a small number (around 2%) of self-employed workers who earn more than £100,000 per year.

In the report Tax Research LLP also recorded significant differences in the earnings between genders. The average income for a self-employed man was £17,000 in 2012 and for women it was just under £10,000. This stark difference may be due to many women working less hours in their self-employed capacity, as they balance working with motherhood.

So why is self-employment rising?

Despite the rather gloomy conclusions from the Resolution Foundation report, self-employment is still on the rise. There are many reasons for this.

Unemployment may be a factor, with initiatives like the New Enterprise Allowance encouraging people out of work to become self-employed. However, there have also been significant changes to our society in the last few decades. New technology has opened up a host of opportunities that are ideal for freelancers and there is a greater emphasis on being able to work flexibly and having a better work-life balance.  

Added to this, it’s becoming more acceptable to work for yourself, with shows like Dragons Den making entrepreneurship more desirable and popular, particularly for younger workers.  And with the cost of childcare costs rising by an average of 150% over the last ten years, more mothers are looking to self-employment, which has coined the term ‘mumpreneurs’.

There has also been a sharp increase in the number of people aged over 65 running their own business – up 140% since 2000. The main reasons for this are thought to be the rise in retirement age, to boost their income during retirement or for something to do as a hobby.

Salary isn’t everything

A recent report by the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) and Etsy looked in depth at why more people are choosing the self-employment route.  

They surveyed over 1,000 microbusinesses (firms with less than 10 employees) and 84% said they were happier than if they were employed, while just 5% were planning to discontinue their business and move back to a traditional paid job.

The report concluded that the main reasons for choosing self-employment were to:

  • have more freedom and flexibility (87%)
  • do work that is more meaningful (82%)
  • live where they want to (66%)
  • work around their physical (54%)or mental health (28%) conditions
  • have time to care for relatives or children (37%)
  • escape unemployment (27%)

However, 37% agreed that they were less able to take holidays and 40% feel more isolated.

It also calculated that the average earnings were £316 per week for a self-employed worker and £390 for an employee. Judging by their satisfaction and reasons for leaving employment, the softer benefits of working for themselves mean they are willing to accept the associated lower income.

Self-employment tribes

Another aspect affecting the self-employment data is that there is no clear definition of what counts as self-employment and that it covers a wide spectrum of trades – from shopkeepers, to freelance translators and app developers.  

The RSA report looked at the types of people who were self-employed, their motivations and developed specific types of self-employed people. For more information, read the report or visit the Virgin website for a good summary

Self-employment tribes by the RSA

Image from the RSA website.

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