The typical self-employed worker earns 40 per cent less than the typical employee reveals a new report which provides the most in-depth picture yet of the UK’s growing self-employed workforce and how it is changing.

The study by independent think tank the Resolution Foundation shows a dramatic fall in the weekly earnings of the self-employed – which have plummeted by 20 per cent since 2007. Over the same period employees have seen their weekly pay fall by 6 per cent on average. Part of the pay drop for the self-employed is down to a reduction in the hours they are now working and part is likely to be due to a shift in the composition of the group, such as a rise in the proportion of the self-employed who are women.

Despite this pay gulf, the report suggests that widespread self-employment is becoming a fixture of the UK labour market and that recent growth in self-employment cannot simply be explained by workers settling for “second best” during the years of economic downturn. In fact, self-employment has grown steadily since the early 2000s and now accounts for 4.5 million workers – one in seven of the workforce. A survey conducted by Ipsos MORI for the report finds that almost three-quarters (73 per cent) of those who have become self-employed in the last five years say doing so was mainly or partly their personal preference, though a growing minority say it was due to a lack of better work alternatives.

The Resolution Foundation report argues the continuing growth in self-employment is explained both by structural changes in the labour force and the cyclical effect of the long downturn. More people are entering self-employment and fewer are exiting.

  • Approximately 72 per cent of the growth since the end of recession is due to more people opting to become self-employed
  • Roughly a third of this (or a quarter of the overall growth) is accounted for by an increase in the numbers moving from unemployment into self-employment rather than becoming employees
  • The remaining 28 per cent of the overall growth is due to fewer people exiting self-employed work

The UK’s ageing and expanding workforce has played a significant part. The ranks of the self-employed have been swelled by a greater number of older workers due to a reduction in the numbers exiting self-employment as some postpone retirement. This is likely in part to be due to low levels of pension savings, and longer life expectancy. Proportionally, part-time work has risen among older self-employed workers at the same time as it has fallen among older employees. Older workers aged 60 or over, make up almost a third (32 per cent) of the self-employed who work part-time. Among employees, by contrast, older workers represent only 13 per cent of total part-timers.

Otherwise major changes seen among the self-employed in recent years – becoming better educated, increasingly working in service sectors – are mirrored in the rest of the workforce. Detailed analysis of the characteristics of those working for themselves suggests that – other than a growing share of women – there is no shift towards a starkly different type of self-employed worker emerging in the post financial crisis era.

The Resolution Foundation report also finds that:

The self-employed are slightly more likely to be underemployed than those with employee jobs. This is a reversal in the situation seen before the downturn when self-employed people were far more likely to be over-employed

One in three of the self-employed (34 per cent) say they would describe themselves as ‘entrepreneurs’

  • 83 per cent of self-employed people report that they prefer to work for themselves while 17 per cent would prefer to be an employee (excluding those who answered “don’t know”). However this changes among those who have become self-employed in the last five years – 72 per cent of whom prefer self-employment while 28 per cent would rather be someone’s employee
  • Workers in semi-skilled and unskilled roles are more likely to say they’d prefer to be an employee. 25 per cent say this overall, compared with 14 per cent in higher-skilled roles
  • Growth in self-employment has far outstripped the growth in employed jobs in the UK since the start of the recession. Between 2008 (March–May) and February 2014, self-employment grew by 666,000 while employees increased by 133,000
  • Self-employment is still male-dominated but women are making up a greater proportion of the self-employed – rising from 27 per cent to 30 per cent, or from 970,000 to 1.29 million, between 2005 and 2013. By contrast, the gender composition of employees has not changed

Gavin Kelly, chief executive of the Resolution Foundation, said: “The growth in self-employment over recent years has been astonishing – but the reasons for it are complex. Some of it can be explained by a workforce that is getting older and putting off retirement for longer, some of it may be down to our growing appetite for being our own boss, and clearly much of it is due to weakness in the jobs market meaning there are fewer other options. Whatever the cause, self-employment is often a highly precarious existence which isn’t that well supported by public policy. High levels of self-employment seem likely to be here to stay and policy-makers have some catching up to do.”

Ben Page, Chief Executive of Ipsos MORI, said: “Self-employment has grown across most parts of the workforce and a sizeable number of the self-employed would describe themselves as entrepreneurs. This confidence is at odds with what we know are the associated difficulties – especially financial insecurity and unpredictability – but only a quarter of the self-employed say they would prefer a regular job.”

The report, Just the Job or a Working Compromise? The changing nature of self-employment, by Conor D’Arcy and Laura Gardiner is published by the Resolution Foundation on Tuesday 6 May.