Busting some common myths about self-employment

I think I can speak for most of my colleagues when I say that the RSA is cautiously optimistic about the rise in self-employment across the UK.  However, we also realise there is a great deal of puff and hyperbole surrounding this phenomenon. I was reminded of this just a few weeks ago when Nectar Card published some North Korean-style survey results suggesting that over 80 per cent of young people want to work for themselves when they become older – a figure that is difficult to square with findings from more comprehensive surveys.

Yet just as the pro-small business camp engage in exaggeration and over-simplification, so too does the anti-small business brigade. Indeed, headlines such as “Young jobless fuel growth in UK start-ups" and "Self-employment hits 20-year high as people try to avoid unemployment" are indicative of how the debate about the causes of self-employment is often one-sided (and negative at that).

Here I highlight three myths in particular about the growth in self-employment that deserve closer scrutiny:

#1 – Most of the newly self-employed have been forced into it

One of the main drivers behind the surge in self-employment is thought to be a lack of jobs – or at least a lack of decent and worthwhile ones. The argument is simple: in the absence of conventional jobs people are forced to create their own in the form of a business. While there is certainly some truth in this, measurements of entrepreneurial motivations show that the number of people starting up reluctantly and out of no choice of their own continue to be in the minority.

The latest results from the Global Entrepreneurship Monitor, for instance, indicate that the level of 'opportunity’ entrepreneurship – where people start up for positive reasons (e.g. to make the most of a good idea) is close to five times higher than levels of ‘necessity’ entrepreneurship – where people start up for negative reasons (e.g. because they had no other options for work). Importantly, both types of entrepreneurship grew during the economic downturn. What is more, our own RSA/Populus survey found that only 15 per cent of microbusiness owners said escaping unemployment was a key reason for starting up. A much more common answer was to have greater freedom or earn more money (click on the graph below to see a bigger version).

Personally, I also think there is something of a ‘trigger phenomenon’ going on here, whereby the recession is nudging people into starting the venture they had always been meaning to.

#2 – Most of the newly self-employed are odd jobbers

As well as examining the motivations of the newly self-employed, some have questioned whether the types of businesses they run are of a ‘serious’ nature. The suggestion is that a large number of the newly self-employed are odd-jobbers who are grabbing onto any and all kinds of work they can lay their hands on. Claims such as these are partly corroborated by the big rise in part-time self-employment, which accounts for half the overall increase in self-employment since the turn of the century.

Yet once again, this isn’t the full story. The government's Labour Force Survey actually shows that the biggest increase in self-employment since 2008 has been in professional occupations – one of the highest skilled labour groups. And while the number of self-employed people in the other highly skilled groups has remained static or decreased marginally, so too have the number of typical employees in these groups. Moreover, if the growth in self-employment really was largely down to more odd jobbers, I would have expected the increase in the number of self-employed in 'elementary' occupations to be much larger than what we see in the graph below.

#3 – The growth in self-employment is a cyclical blip

The number of microbusinesses grew by over half a million since the Great Recession began, and the proportion of the workforce who are self-employed is at highest ever level. Myths 1 and 2 have led many to believe that these changes are likely to be short-lived, and that when the economy gets back on its feet things will return to normal. However, this ignores the fact that self-employment and the number of microbusinesses had been increasing at a steady rate long before the recession began (see the graph below).

The number of microbusinesses in the UK has grown by an average of 3 per cent a year since the start of this century. Indeed, they are now very much a ‘normal’ feature of our economic system. Studies also suggest that at an individual level, the likelihood of a business owner returning to a typical job is low. Our own Populus survey found that only 7 per cent  of microbusiness owners plan to close their business in the next 3-5 years and do something else.

The RSA and Etsy are exploring similar themes in a new project, The Power of Small - find out more.