Is the rise in self-employment good for the economy?

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The latest ONS figures show a rise in self-employment again, taking self-employment to just over 15% of total employment – the highest since the ONS starting collecting employment data on a quarterly basis in 1992.

The growth of self-employment in the last few months is not as dramatic as it has been, but the longer-term trend suggests that overall levels of self-employment are unlikely to go into reverse any time soon. Self-employment was rising long before the financial crisis. It’s looking increasingly like it’s here to stay.

But what does this mean for our economy? Is it a sign of a kindling of Britain’s entrepreneurial spirit or a reflection of the difficulty of finding jobs in employment?

Blog Chart Nida Self Employment as a proportion of total employed

Recent analysis by the Resolution Foundation suggests that those in self-employment experienced much larger drops in income during the recent downturn than those in employment. But, at the same time, many in self-employment are satisfied with their current circumstances. And more people going it alone, starting new businesses and bringing new ideas to market has to be good for growth, right?

Well, no. Self-employment as a category tells us very little about economic growth. It lumps together freelancers, contractors, and owner-managers of businesses. It includes people who have ambitions to turn their start-up into a million pound company, and people who just want a bit of flexibility and extra cash, perhaps as they near retirement age.

There are a whole range of reasons why people go into self-employment. But if we’re interested in whether the surge of self-employment means we can expect a new wave of entrepreneurialism that boosts economic growth, we’re looking in the wrong place.

There is no link between start-up rates and economic growth. Instead, economic growth is related to the number of people who start-up new businesses out of choice because they have spotted a new opportunity.

Handily, we have data on this. And it shows that whilst the UK might be the “self-employment capital of Europe”, it certainly isn’t the capital when it comes to the types of entrepreneurs that create economic growth.

Blog Image Nida High Value Entrepreneurs UK International Comparison Venturing Forth

These opportunity-driven entrepreneurs are more likely to have ventures that are profitable and businesses that grow over time. They often have existing skills, experience and networks when they start their new businesses – factors that are vital in turning their businesses into a success. It is estimated that over half of new start-up ideas come from previous experience.

With our current levels of productivity growth, we need to start focusing much more on why we don’t have more growth-boosting entrepreneurs. Recent SMF research finds that fear of failure and an inability to take a risk to household income are the key factors preventing these types of potential entrepreneurs from starting a business. If we want to increase our future economic prosperity, that’s where we need to look.

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