We are in a curious phase. The growth news is getting better, as should be confirmed by second-quarter figures for gross domestic product this week, with a solid rise expected after the 0.7 per cent first-quarter increase. Yet stronger growth is still not fully reflected in the labour market.
Here, just-published official figures showed a mixed picture. Although the unemployment rate fell to 4.2 per cent, this was balanced by a rise in the economic inactivity rate to 22.2 per cent and an increase in the claimant count to 1.8 million, partly for technical reasons.
Employment rose a little in the latest three months, from April to June, but full-time jobs were down and the figures were boosted by an increase in unpaid family workers. Workers on payrolls’ numbers have been broadly flat this year, according to the Office for National Statistics. Job vacancies fell again, if only marginally.
You might say that this is merely a case of the normal lags operating, with labour market data for the first half of this year reflecting the economy’s weakness in the second half of last year. Therefore, after a decent interval, the labour market will perk up.
However, surveys suggest that if this is the case, the lags are quite long. The latest KPMG-Recruitment and Employment Confederation report on jobs, published a few days ago, indicated that the lacklustre job market had persisted through the summer. It found that “permanent staff appointments continued to fall in July, albeit at a slower rate. A reduced number of vacancies and subdued demand for staff was reported to have led to the decline in placements. There was also a reduction in temp billings in July. There was evidence of firms choosing not to replace workers whose contracts had expired.”
While most measures of business confidence have risen quite strongly in recent weeks, the REC found that “employer confidence to recruit has not yet returned”. It will be interesting to see how that develops. One fear at the Bank of England is of stronger growth adding to pay pressures. Latest official figures showed average earnings growth easing further to 5.4 per cent for regular pay, or 4.5 per cent for total pay.
Another aspect of this is interesting. You will know that the Office for National Statistics has been having problems with its labour force survey, which is why some aspects of the jobs market data should be treated with caution. But it would surprising if the broad thrust of the figures is too far out.
One of those broad thrusts is a big retreat in the number of self-employed people. Immediately before the pandemic there were 5.03 million self-employed people in the UK; now there are 4.27 million, down by 15 per cent. And while there was a tiny rise in the latest quarter, the total was down by 50,000 over the past year.
What has happened? Rising self-employment was a feature of the British economy for many years, increasing from 3.3 million in the early 1990s to more than five million on the eve of the pandemic, that’s up more than 50 per cent. It was seen as the flowering of the entrepreneurial spirit and, for many people, working for themselves was seen as preferable to being employed by somebody else.
There are several reasons for the fall. One was that many self-employed people did not qualify for furlough-type support during the pandemic, the self-employment income support scheme, in most cases because they had not been trading for long enough. Eligibility for the scheme was estimated by the government to be 3.36 million out of a self-employed population some way in excess of that. Many of those that did not qualify switched roles and became employees during that period. The statistics suggest a lot of them never came back.
A second reason is other changes in the labour market, some of which have been described here before. Labour force survey figures show that there are just over 33 million people in work, the same as immediately before the pandemic, but within this there has been a drop of about a million in the number of UK-born workers and a rise of a million in the non-UK born. In this case, non-UK also means non-EU because there has been a drop in European Union-born workers over this period.
Those coming from abroad on work visas overwhelmingly will have taken up positions as employees, automatically increasing the proportion of people in work who are employees rather than self-employed. To that can be added what may be a significant number of the pre-Covid self-employed dropping out of the labour market completely.
No piece on the self-employed would be complete without mentioning IR35, HM Revenue & Customs’ prolonged effort, dating back to the start of this century, to prevent what it thinks of as “disguised employees” taking advantage of the self-employment tax regime. Many self-employed people regard IR35 as a scourge. It was blamed for the shortage of HGV drivers a while ago, with many older drivers deciding that it made retirement more attractive.
For self-employed people, there is a big difference between being “inside IR35” and deemed to be a PAYE employee for tax purposes and being outside IR35 and carrying on as before. It is hard to think that it has not resulted in some self-employed people becoming employees and others dropping out altogether. The other scourge of the self-employed is the loan charge, written about many times in this newspaper, which deserves a piece on its own.
Does it matter that we have suffered a big drop in the number of self-employed people? Yes. Self-employment is often the first step towards establishing a small business employing others and generating wealth, which can then develop into a larger business. Lose that pipeline and the economy will suffer over the long term. Close it off with unwise tax changes and you have a problem. We should be concerned about the drop in self-employment.
David Smith is Economics Editor of The Sunday Times