How jobs figures mask bogus self-employment in the shadow economy

This article by Tony Dobbins, Professor of Employment Studies, Bangor University; Alexandra Plows, Research Fellow, Bangor University, and Howard Davis, Professor of Social Theory & Institutions, Bangor University was originally published on The Conversation. Read the original article.

The UK has posted disappointing jobs data. Unemployment rose slightly for the first time in seven months, by 21,000 to 1.7m. It is still at a respectable rate of 5.1% and employment remains very high at 74.1%. But the figures need unpicking to identify the problems that lie beneath the surface of the country’s economy, despite months of positive headlines.

A closer look at the jobs situation in the UK shows that since the 2008 financial crisis, many workers have experienced low-wage precariousness. There has been an increase in flexible “non-standard” working patterns: part-time work, zero hours contracts, and underemployment.

Self-employment in particular has risen sharply. Official data indicates an all-time record of 4.63m self-employed people in 2016 (15% of the UK workforce) – nearly double the figures in 1975. Self-employment is common in sectors like construction, social care, delivery drivers, taxi drivers, hairdressing, and management consultants.

The UK government recently commissioned an independent review of self-employment – the Deane Report. But, as the Royal Society of Arts states, while the report rightly emphasised the living standards of the self-employed, it is “an underwhelming response to an overwhelming phenomenon”.

One in seven working people are estimated to be self-employed and the types of people and their experience of self-employment varies significantly. For example, a stay-at-home mum in a two-income family running her own childminding business and a single parent cleaner on a zero hours contract may both be self-employed but have different experiences.

Too little is known about changing work patterns at the margins of the labour market and research is required to explore peoples’ experiences of self-employment. In the meantime, there’s a risk that a growing chunk of the workforce will experience precarious, insecure working lives in a system currently ill-equipped to provide sufficient numbers of good quality jobs. The UK does not have a coherent labour market policy or industrial strategy to address these problems.

Low paid and precarious

People might self-identify as being entrepreneurs by managing to earn anything at all in a post-crisis jobs market. This is especially the case in regional economies that have been hollowed out by the decimation of traditional industries such as mining and steel in Wales.

On average, the self-employed earn less than other workers, as well as having less access to benefits like training and pensions. They are exempt from minimum wage legislation, so will not benefit from the recent minimum wage increase.

A 2015 parliamentary briefing shows that, worryingly, average income from self-employment fell by 22% between 2008-09 and 2012-13 to £207 a week. And data from the Family Resources Survey indicated that in 2012-13, the average (median) income from self-employment sources was £11,000 a year. This compares with current official average earnings data for the whole labour force of £497 a week and £25,844 annually.

Self-employment status can also be used to circumvent the rights that people with employee status get such as sick leave and holiday pay. Evidently, more employers have been replacing directly employed staff with workers who are formally and legally self-employed but in reality highly dependent on a firm. By having commercial contracts instead of traditional employment contracts, firms can avoid employment and social security laws. In so doing, they have more control and power over these workers, as well as increasing their profits.

An ‘uberised’ economy

This shadow economy is encroaching into diverse sectors like oil and gas, as well as delivery and taxi drivers. In addition to on-demand apps such as Uber, new firms are emerging such as TaskRabbit, an online service for outsourcing everyday jobs, and Upwork, a platform for freelancers. This increased “uberisation” of the online market for casual labour and the impact of new technology means it includes both low and high skill occupations.

Uber is a good example of how self-employment has become a contentious classification. There are more than 30,000 Uber taxi drivers in the UK, who are labelled as self-employed partners. But the GMB trade union, which covers a number of industries, is supporting a claim by Uber drivers for the minimum wage and statutory holidays – benefits that are normally afforded to employees but not the self-employed. Meanwhile, in the US, the California Labor Commissioner’s Office ruled in June 2015 that an Uber driver should be classified as an employee, not an independent contractor.

The rise in false self-employment, dependent self-employment, online labour, and the expansion of the shadow economy generally, renders regulation problematic. A number of trade unions have periodically campaigned on related issues. But unions still mainly represent members in conventional employment and larger organisations.

Tax and other regulatory bodies also face classification problems in terms of how different kinds of employment status are or are not legally recognised in contracts. Classification is more problematic given labour market fragmentation and diversity of individual employment status.

False self-employment is not an official classification, by the statistics body the ONS, for example. It has, however, been acknowledged by the tax authorities and the UK Trades Union Congress, due to concerns that bogus self-employment may be designed to avoid employment rights and tax and social security payments that would normally be associated with employee status.

There are no figures on the extent of this shadow economy activity and estimations are difficult, as it is often secretive. But, if left unchecked, problems like misclassified bogus self-employment could further erode job quality, employment rights, create tax deficits, and extend the precarious shadow labour force.

Publication date: 20 April 2016