meaningful results




In his Tax Research UK blog, Richard Murphy draws some curious conclusions from the latest HMRC figures on self-employment income, and as they make for rather enticing headlines that are starting to whizz round Twitter at least, a couple of cautions from me.


Everyone has now noticed that a big part of the rise to record levels of employment in the UK has come from increasing self-employment. And that some of this is full-time and some part-time. Whether this is a sign of increasing opportunity (good) or of increasing necessity (bad) is the question. Looking at how self-employed earnings are changing would help answer that question, but there is very little information on that. The Resolution Foundation produced a comprehensive assessment here of what we know.

One of the few sources of data is a yearly analysis published by HMRC of income declared to them for tax purposes. Last week (30 January 2015) these figures came out for the tax year 2012-13.

Richard looked at these and said

So, what are the conclusions?

First, if mean pay is about £20,000 then 91.5% of self employed people earn mean pay or less.

Second, if two thirds of median pay is a measure of poverty (or £15,000 or less here, at least) then 84% of the self employed would be in poverty based on their self employed earnings and 77% are based on total income.

Quite dramatic, but I always think that the more the drama the more the need for caution.

Firstly, who are the ‘self-employed people’ Richard is referring to? The official labour market statistics about the number of people in work count each person only once according to what they do in their main job. Otherwise people with two or more jobs would be double-counted. So the rising numbers of self-employed in the employment figures come from more people identifying themselves to the UK Labour Force Survey as being self-employed in their main job. A main job can be full-time or part-time.

So the employment numbers don’t count anyone who takes up self-employment as a sideline to some other job as a new self-employed person. For example, let’s take Lisa who is employed full-time as a schoolteacher on a salary of £30,000. She is an employee. If she starts to do some private tuition in the evenings on her own account then she begins to earn money from self-employment too, let’s say around £100 a week to give her an extra £5,000 a year. But she is still an employee in her main job so this new activity won’t show up in the employment statistics on the numbers of employees and self-employed (though it will add to the numbers of people with second jobs).

Understanding this is critical to interpreting the HMRC data. Their figures include everyone who has declared any income from self-employment to them. So all of these people will do some work on their own account, but if you asked them what they did for a job they would not all say that they were self-employed. Lisa would almost certainly say she was a teacher at a school. But Richard is counting her as a self-employed private tutor. And when he looks at what self-employed Lisa earns he says she earns £5,000 - barely a quarter of mean income.

So mean income only from self-employment activity is not all an accurate or meaningful measure of what “self-employed people earn”. HMRC record 5.5 million people with some income from self-employment but the official labour market statistics showed only 3 million in full-time self-employment as their main job and 1.2 million in part-time self-employment in their main job. That means for a quarter of those with self-employment income, those earnings are additional to their main job, and so they cannot possibly be said to be in poverty on the basis that these earnings aren’t enough to live on.

This makes less than meaningful the conclusion that 91.5% of the self-employed earn less than mean income and that 84% would be in poverty based on their self-employed earnings.

But what about the conclusion that 77% would be in poverty even taking total earnings into account – as these are recorded by HMRC too? Well poverty is measured by household income, not individual income. Obviously Lisa isn’t at risk of poverty because although her self-employed earnings are only £5,000 her income is £35,000. But look at her friend Hari who is an aspiring freelance photographer and although self-employed in this main job only earns £6,000 a year from the work. Surely he must be in poverty?  Well actually he is Lisa’s partner and they live together, and with a household income of £41,000 for a couple they have well above median earnings and are nowhere near poverty.

It is even less meaningful to suggest that an individual with low earnings who is part of a couple is likely to be in poverty purely on the basis of his or her earnings alone, because they are no indication of the total income available to the couple.

In fact, one might as well say that all stay-at-home parents caring for children are in poverty because they don’t have an income at all.  

"100% of stay-at-home parents in poverty". Now that really would be a headline.


Update 1 February 2015: For those who like things grounded in proper academic stuff - Professor Sara Carter surveys and explains theoretical, methodological and data issues around assessing drivers and success measures of self-employment here ... 


 With thanks to Benedict Dellot for the link. 

Some other puzzlers ...

Resolution Foundation

The newly self-employed are likely to be suffer from some vulnerability and insecurity. But they don't appear to be much different in any key characteristic from the existing self-employed. Link to their report is here 


Morgan Stanley

There are five key drivers of increases in UK self-employment. Overall these suggest the growth derives from weakness in the economy and is a sign of slack. Their report should download here.

Steven Toft (@FlipChartRick)

Increased self-employment doesn't appear to be necessarily a good thing, looked at internationally and macro-economically here

Benedict Dellot from the RSA

Growing self-employment results from opportunity not necessity,  and suggestions to the contrary are myths to be busted here

Adam Lent from the RSA

High self-employment rates aren't a sign of economic weakness, but stirring entrepreneurial spirit here


The growth of self-employment is part of a trend towards casualised work, likely to hold back wages, and prevent people from having the kind of secure employment they need to pay their bills, save money and plan for the future here 

Jonathan Portes

Writing in Financial World, Jonathan puzzles over the lack of productivity rebound from recession, and wonders whether ground has been lost permanently here.

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