Contractor number increases throughout the UK over the past seven years have not been driven by the recession, but rather by structural changes to the economy.
This is according to The Post Crisis Growth in the Self-Employed: Volunteers or Reluctant Recruits?, a study by Andrew Henley, which provides a comprehensive analysis of the recent self-employment growth in the UK
It helps to dispel the myth that an increasing amount of people have turned to contracting simply as a better alternative to being unemployed. The study mirrors the findings of a recent Bank of England report, which also highlights that cyclical factors such as changing economic conditions have a largely insignificant impact upon self-employment, when compared with structural factors.
Flexible workers are not ‘victims’, they choose contracting
This increase in the size of the contracting sector and the flexible workforce has been a pronounced characteristic of the UK labour market for a considerable amount of time, with more than 15% of those in work opting to go self-employed.
However, much of the recent growth has been attributed to people taking on part-time, low skilled work, with the media casting much of the contractor workforce as victims of the economy.
Meanwhile, the significant rise in limited companies as a result of the upsurge in contracting, coupled with the failure of IR35 to generate anywhere near the expected £430m in tax per year, also provides further proof as to how ineffective the legislation is.
No such “push factors” when for opting for contracting
The basis of Henley’s study largely concerns weighing up “push” and “pull” factors regarding the decision to work self-employed. The “push” effect denotes those who have supposedly been forced into self-employment due to weak local labour market conditions. The “pull” effect considers improved local labour market conditions which make contracting a viable and attractive proposition.
Whilst “push” factors were found to be largely non-existent, a tendency was found amongst respondents to favour self-employment to maximise upon better local business opportunities and significant market demand, an outlook more in-tune with the healthy state of the current economy.
Henley summarises: “The vast majority of the self-employed appear to report opportunity-related or personal independence-related motives for their choice of economic status, and not to attribute any significance to “recession-push” factors.
‘Just the Job or a Working Compromise? The changing nature of self-employment’, a study by think-tank organisation Resolution Foundation - which attempts to attribute much of the growth in contracting to the recession - itself found that the substantial majority of self-employed respondents (84%) reported to undertake self-employment out of personal choice.
Contracting is not a result of regional poverty
Contrary to the notion that self-employment is often born out of poor economic conditions, growth in terms of contractor headcounts is particularly evident in some of the regions with more prosperous job markets.
In buoyant economies such as London, the South East and the West Midlands, self-employment grew between 17% and 19% during the period from 2008 to 2013. In this same time-span Yorkshire and Humberside and the East Midlands recorded growth of 7-8%. Meanwhile, the North East and the South West each recorded a growth rate between 10% and 12%.
“Rather than adding fuel to the fire over myths about self-employment being a last resort, these results show contracting for the prosperous and flexible alternative that it is,” highlights ContractorCalculator CEO Dave Chaplin. “Contractors are increasingly plying their trade in buoyant markets where their skills and services are in higher demand.”
Henley concludes: “Local economic and labour market conditions appear to exert a largely positive influence on the likelihood of choosing self-employment. There is little or no suggestion of any net “recession-push” effect of self-employment.”
Contractors choose higher-skilled roles
The notion that self-employment is simply seen as a better alternative to unemployment is further dispelled by another study, ‘Self-Employment in the UK’, which comes courtesy of the Department for Business, Innovation and Skills.
The study acknowledges that the self-employed tend to work in higher-skilled roles on average, when compared with their permanent employee counterparts, with more than 26% of self-employed workers deemed to be working in ‘skilled trades occupations’, 16% in ‘professional’ and 14% in ‘professional and technical’.
The correlation shown within the study between the higher proportion of senior, professional and technical positions in London and the South, along with the higher proportion of contractors in the same region, compared with areas further North, also provides supporting evidence to suggest that the self-employed are undertaking more advanced roles than the media perceives.
Resolution Foundation also acknowledges that, since 2005, the composition of the self-employed has become that of a workforce that is increasingly qualified to fulfil higher skilled roles.
Structural change has been the dominant factor
It would be hard to argue that cyclical factors, such as the recession, haven’t influenced the decisions of a minority of the contingent workforce. Resolution Foundation highlight that employee vacancy levels remained weak even as the employment recovery took shape following the recession, suggesting that self-employment has assisted somewhat in driving down unemployment.
However, Henley notes that structural growth in self-employment in the UK was evident well before the onset of the global financial crisis, and has simply continued at a significant rate since, highlighting that improved perceptions of entrepreneurship and availability of resources and skills have instead encouraged the upturn in self-employment.
This is supported by the Bank of England report, which states: “A large part of the increase in self-employment since 2008 does indeed seem to reflect trends that began before the recession.”
Henley concludes: “[Self-employment] is the outcome of voluntary choices made by individuals who in part respond to local signals about economic opportunity. The self-employed do not appear to be reluctant converts to entrepreneurship, “encouraged” into business start-up activity by the absence of (well paid) local jobs.”
IR35 intake not matching up to contractor growth
This research is the latest in a long line of studies indirectly emphasising the ineffectiveness of IR35. The Treasury has been promised £430m in additional tax per year by HMRC as a result of the legislation, yet so far it hasn’t come close to that figure.
This comes in spite of the significant increase in limited companies as a result of the expansion of the contractor workforce. A Kingston University study earlier this year highlighted that the number of limited companies without employees had grown by 20.3% between 2008 and 2015, and by 7.5% between 2013 and 2014.
“As well as helping to dispel negative, incorrect portrayals of the contractor workforce, this study helps to show IR35 legislation for what it really is,” concludes Chaplin.
“The fact that the Treasury is not seeing an increase in tax yield similar to the rate of growth of limited companies provides further proof that IR35 does very little but to act as a brake on the entrepreneurial activities of contractors.”