Questions and answers about coronavirus and the UK economy
Questions and answers about coronavirus and the UK economy

Update: How is coronavirus affecting the self-employed?

A year into the Covid-19 crisis, it is widely recognised that the UK’s self-employed workers have been among the hardest hit. Survey evidence shows that the latest lockdown is once again leaving the self-employed with lower incomes and substantially reduced hours.

Becoming self-employed allows workers to enjoy the flexibility of being ‘their own boss’. But striking out on your own also means that you no longer have an employer to protect you from economic shocks when they come around. Covid-19 – by some measures the UK’s greatest economic shock for over a hundred years – has demonstrated the acute vulnerability of the self-employed, who before the pandemic represented around one in every seven UK workers.

Research conducted early in the crisis demonstrated that the self-employed were being particularly hard hit. Despite some improvements in the summer and early autumn, recent evidence shows that the most recent lockdown is once again leaving the self-employed with lower incomes and substantially reduced hours.

The Self-employment Income Support Scheme (SEISS) – the government’s headline support scheme for self-employed workers – has provided a lifeline to many workers for almost a year. The Chancellor’s March 2021 budget saw the biggest changes yet to the scheme, with an expansion in coverage and attempts at better targeting.

The UK Labour Force Survey shows a record decline in the number of self-employed workers. Digging deeper into the details shows the story to actually be far muddier than this, with strong evidence of a decline in workers entering self-employment.

How are the self-employed faring?

The lockdown restrictions in place since the start of the year have once again limited the extent to which many self-employed workers can carry out their work. Recent survey figures show 14% of self-employed people leaving their jobs in January 2021, up from September and May 2020 (Cominetti et al, 2021). Another survey conducted by the Centre for Economic Performance (CEP) finds 37% of self-employed working ten hours or fewer per week in January 2021, up 14 percentage points from August 2020 (Blundell et al, 2021).

In terms of financial distress, just under half (46%) of self-employed workers report having had trouble paying for basic expenses in January 2021. This is up from 29% in the summer but down from 33% during the first lockdown. Evidence from bank account data suggests that SEISS has at least helped to hold up living standards in the face of precipitous declines in earnings.

Figure 1: Monthly income in April 2020, August 2020 and January 2021

Note: Self-reported income in April 2020, August 2020 and January 2021 among self-employed workers (Blundell and Machin, 2020; Blundell et al, 2021).

What is the government doing to support the self-employed?

SEISS has now been in place for almost a year. For those receiving the maximum amount from each grant, the total value received will soon exceed £29,000 per worker, only marginally lower than the average UK annual earnings.

The March 2021 budget contained several important changes related to SEISS. As expected, SEISS has been extended to September 2021, in line with the furlough scheme for employees. After political pressure and growing evidence of need, the grants have been extended to meet one of the ‘excluded’ groups: those who became self-employed after April 2019. This is now possible thanks to the availability of tax returns from the 2019/20 financial year.

While this has been welcomed by many commentators, there remain important gaps, notably those with earnings over £50,000 and those receiving under 50% of their income from self-employment. The Institute for Fiscal Studies (IFS) has argued that supporting these groups would be relatively straightforward. This is in contrast to the large group of company directors, for whom there are substantial challenges with implementing effective support.

A second substantive change is the announcement that the fifth grant – covering May to September 2021 ­– will, for the first time, be made conditional on the magnitude of the loss from Covid-19. Previous rounds have been independent of the magnitude of the loss, leading to concerns about the distributional effects and fairness of the transfers. Those with turnover reductions of less than 30% will see substantially lower rates of support. Exactly how these turnover reductions will be credibly reported remains to be seen, and represents an interesting case study in the challenges of delivering well-targeted support to the self-employed.

Despite the government’s good intentions, whether the available support is enough for self-employed to stay afloat remains unclear. According to the IFS analysis of bank account data, the first round of SEISS grants fully compensated its recipients on average, also though the evidence also suggests some bills and rental payments have been lower than last year.

What is clear is that as the crisis continues, the gap between those eligible and those not eligible continues to grow. More recent survey evidence has found that across all self-employed workers, 62% report being worse off as a result of the crisis, even after taking account of government aid.

An unprecedented drop in the number of self-employed workers?

Rising self-employment, particularly solo self-employment, has been a key feature of the UK’s labour market for at least two decades. Figure 2 shows a striking reversal of this trend since the crisis hit. From the end of 2019 to the third quarter of 2020, self-employment shrank by 500,000 workers, a fall of just over 10%. Taken at face value, this decline represents the most significant change in self-employment for decades.

Changes in self-employment are driven by shifting inflows (people becoming self-employed) and outflows (workers leaving self-employment). Analysis of LFS data shows that the third quarter of 2020 saw the lowest number of workers joining self-employment across the period.

Indeed, looking further back, this is the lowest number for at least two decades. The drop is despite high levels of company incorporations in the latter half of 2020 and the first few weeks of 2021. While there is some evidence of the crisis spurring innovation in industries with new opportunities, self-employment as an employment status is broad, and bears little connection to this.

Figure 2: Number of self-employed workers in the LFS

Source: Quarterly Labour Force Survey

Work on the longitudinal version of the LFS – where groups of workers are followed over time – shows that in 2020, movements from self-employment to employment were at their highest levels for 20 years. This uptick turns out to be entirely driven by those in the ‘Managers’ occupation group, who in many cases sit at the boundary between self-employment and being an employee. With employment status in the LFS based on self-reports, the Office for National Statistics (ONS) has argued that these statistics are likely to reflect a change in perceived status rather than a real change in job. The high-profile furlough scheme may have made these workers’ status as employees more salient.

Indeed, the LFS data reveal only a small change in the number of ‘previously self-employed and now employed’ reporting a change in job. In the recent CEP survey, 81% of individuals switching from self-employment to employee jobs report that they are in the same job, supporting the argument that this is a change in perception of employment status rather than a real change in occupation. This issue highlights the challenges with studying the self-employed in the current data environment in the UK.

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Author: Jack Blundell and Maria Ventura
Photo by m0851 on Unsplash.
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