The Fall In Self-Employment Due To The Cost Of Living Crisis

Throughout the Covid pandemic, various studies highlighted that the self-employed tended to fare worse than salaried employees. Research from the London School of Economics suggests that matters have not changed a great deal as we exit from the pandemic period and struggle through the cost of living crisis.

The survey, which was conducted in November 2022, is part of a six-part series that began in May 2020 and ran throughout the pandemic. The survey was designed to understand how the self-employed fared during the period. It’s a period in which the number of self-employed workers fell by around 16%, with the financial hardship caused by the pandemic the principle culprit.

“One of the characteristics of the self-employed over the years has been their ability to sustain their activities, even in difficult economic conditions. But the series of shocks encountered over the past three years are fully testing this resilience,” the researchers explain. “There has already been a recent exodus of the self-employed. Our new analysis explores some of the reasons for this, and raises concerns that economic hardship among the self-employed, especially for some of those in solo self-employment, will continue, given the scale of challenges.”

Difficult times

Despite the economic consequences of the pandemic largely passing, the situation is showing no signs of improving, with those leaving self-employment growing faster than those entering it. The researchers believe that this is largely because of the poor financial prospects offered by the pathway.

Indeed, the survey found that the share of those earning less than £1,000 a month rose by 12% compared to before the pandemic, and was 4% higher than it was during 2021. This puts a considerable strain on people’s finances and makes it that much harder to make ends meet. Indeed, around a third of respondents said that financial difficulties were a major concern.

The current difficulties are largely being driven by the rising costs of energy and wider inflation, which are causing around 25% to say they worry that their business won’t survive the coming months. Nearly half of the respondents said that energy costs were their main concern, with other costs not far behind.

Long-term consequences

These financial difficulties promise to have long-term consequences, not least in terms of adequately saving for one’s retirement. This is of particular concern for the self-employed, who lack many of the pension-related benefits that employees are eligible for. For instance, the self-employed don’t enjoy contributions from their employer, which means that many receive a pension that is around 50% lower than that available to salaried employees.

This situation has worsened over the last decade as fewer self-employed people contributed to a pension. Indeed, the survey found that a whopping 73% of respondents were not currently contributing to a private pension due to insufficient income.

The researchers explored various alternatives to try and elicit greater savings among the self-employed. One of the most effective was when the government would match any contributions made by each individual. Around a third of the lowest-paid self-employed workers said that they would pay into a pension under such circumstances. This rises to over half of those with higher income levels.

Political change

The survey also revealed that the self-employed are changing politically. Whereas traditionally conservative parties have been the natural home for businesses, this is increasingly less so for the self-employed, who have grown disenfranchised by the Conservative government in the U.K.

The researchers explain that whereas support for the Tory party has fallen by around 50% since the start of the pandemic among the public as a whole, this is even true among the self-employed, who have increasingly felt ignored by the government and are seeking political representation elsewhere.

It’s unclear what impact this might have in any upcoming elections, but what does appear clear is that the worsening economic climate is discouraging people from embarking on self-employment. This is perhaps especially so given the tight labor market that is making routes into salaried employment more available than might otherwise be the case. Either way, it’s not a great prognosis for self-employment and entrepreneurship.

“Looking forward, as a route to an entrepreneurial career and financial independence, the attractiveness of this type of employment is seriously under question. No one would doubt that there had been growth in self-employment prior to the pandemic and this took many forms: from those enterprises that will grow to employ others, through to independent solo workers and part-timers,” the authors conclude. “However, we are now witnessing a retreat in the number of full-time self-employed workers and those self-employed who employ others, and a rise in the share of workers at the margins of the economy: the temporary solo and part-time self-employed.”