Contracting played an integral role in keeping the UK economy afloat during the great recession of 2008/9, by delivering flexibility and competitiveness for businesses.
This is the conclusion drawn from a recent paper by Bank of England senior economist Professor Stephen Millard. ‘How does labour market structure affect the response of economies to shocks?’ examines the way the UK responded to the financial crash, attributing the economy’s accelerated recovery to two factors: flexibility and competitiveness.
As ContractorCalculator CEO Dave Chaplin highlights, both are key characteristics of the contracting sector: “The ad-hoc nature of contracting means businesses can access the necessary skills they need where and when they need them. This increases competitiveness from both a cost and performance perspective.
“Following the recession, we had to put up with a lot of short-sighted claims that people were simply entering self-employment as a better alternative to unemployment,” Chaplin adds.
“This study shows that the relationship between the contracting sector and the recession was far different. That contracting as a way of work has helped to mitigate the impact of the recession and accelerate the recovery of the UK labour market.”
Professor Millard came to his conclusion by running a series of counter-factuals through a standard model to predict the outcome of the recession if a different labour market was in place. For example, a more rigid model – where more restrictions are placed on wages, and company headcounts aren’t allowed to fluctuate – wouldn’t have fared nearly as well.
“We found that the rise in unemployment would have been greater; and the fall in real wages less pronounced, had the UK labour market not been as flexible,” explains Professor Millard.
The good news for the economy is that the contracting sector is continuing to grow. More firms are recognising the intrinsic benefits of engaging with contractors, and the economy looks increasingly well-equipped to manage another recession as a result. The public sector has learnt the same, and has managed to maintain front line services by using contractors, despite austerity measures.
However, the recent findings do raise further questions over the impending public sector IR35 reforms. According to Chaplin, the paper provides proof that the UK Government should be seeking to strengthen the contracting sector, not weaken it:
“Our flexible labour market is clearly a source of competitive advantage. This raises the question: Why is the Chancellor insisting on inhibiting this working arrangement?
He concludes: “The stronger the UK contracting sector is, the better placed the economy will be to withstand the forces of recession and emerge stronger than the competition.”