In Q4 2019, just before the onset of the pandemic, the UK was home to 5.0 million self-employed people. The number had been on an upward path over the past two decades, both in absolute terms and as a share of all those in employment. Between 2000 and 2019 the number of self-employed had increased by 1.7 million, rising as a share of all those in employment from 12% to 15%.
2020 and 2021 have seen a reversal of this trend. Based on the latest Labour Force Survey, 4.3 million people were reported as being self-employed in Q3 2021 and Cebr expects this would have fallen further to 4.2 million in Q4. Understanding what has happened to the 750,000 people that have dropped from reported self-employment since the onset of the pandemic will be crucial to predicting the labour market dynamics of the ‘new normal’.
As the Office for National Statistics has pointed out some of this drop is explained by people that switched their perception / reporting of their own employment status without actually changing jobs. These are people that had previously set up their own companies and thus considered themselves as self-employed. When the UK’s furlough scheme was introduced, these workers realised they were eligible for support as long as they were paying themselves via PAYE so some started categorising themselves as employees rather than self-employed.
This change in reporting due to the furlough scheme only tells us part of the story, however. The drop in the number of self-employed has persisted throughout 2020 and 2021 rather than just being concentrated at the onset of the furlough scheme. Also, since the start of the pandemic the inflow of the self-employed into the labour market i.e. the number of people becoming self-employed has hit lows not seen since 2008. Hence the drop in the overall self-employment figure is not only due to the outflow of previously self-employed persons. As a rough estimate, if we assume that the drop off in the inflow to self-employment is largely explained by factors unrelated to the furlough scheme and that a fifth of the outflow is due to actual job changes, that would mean that around 344,000 self-employed have genuinely dropped out of self-employment since the onset of the pandemic. This is nearly half (46%) of the overall decrease, which also takes into account those changing their reporting status without a material change in their job.
A holistic look at the labour market data published over 2020 and 2021 suggests that, beyond reporting peculiarities, self-employment has become less attractive since the onset of the pandemic. Two plausible explanations for this are 1) that the recent economic turmoil has highlighted the risks of self-employment and 2) that the hybrid model of part home and part office work adopted by many employees in light of Covid-19 has eliminated some of the incentives of pursuing self-employment.
Generally, in times of greater economic uncertainty, working as an employee of a company offers more protection than being self-employed. Given the economic turmoil of the past two years, many workers may have been tempted by the relative safety of working for a company rather than striking out on one’s own. On the other hand, one of the biggest advantages of most forms of self-employment is the flexibility to choose your own hours, geographic location and place of work. The hybrid working arrangements that many companies are now making available to employees for the long term, mimic these most attractive aspects of self-employment. Hence, for many workers the pandemic has tipped the cost-benefit analysis between employment and self-employment in favour of employment.
Looking ahead to 2022 and beyond, the labour market is set to remain robust with demand for labour set to outstrip supply in a number of industries, thereby furthering wage pressures. Higher wages may further intensify the newly emerging trend of declining self-employment. By the end of 2023, Cebr anticipated a total of 33.3 million people to be in employment. If pre-Covid trends had continued about 5.1 million of them would be self-employed. Instead, we now anticipate only 4.2 million will be reported as self-employed – a difference of 832,000. This is partially a reflection of the reporting changes made as a result of furlough (since this is a matter of perception we anticipate some people will permanently change their reporting status even though furlough has ended), but also a reflection of the changing labour market dynamics in the ‘new normal’. As many employees continue to enjoy newfound freedoms of hybrid working, fewer will be incentivised to pursue self-employment, which carries some of the same benefits, but also a lot more risk.