International data shows there’s no need to panic about the rise in self-employment and micro-business

April 13, 2014 by
Filed under: Adam Lent, Enterprise 

The rather marvellous Steven Toft (AKA Flipchart Rick) has been blogging a lot recently about self-employment. He’s not keen on it. Based on international data he argues that higher self-employment correlates to weaker economies.

The reason being that less successful economies can’t afford to employ and pay everyone properly so large numbers have to scratch out a living working for themselves. He also suggests that the causality runs the other way: smaller companies and self-employed people are not as productive as big companies because they do not have the same scale of resources to throw at innovation and efficiency.

For these reasons (and this is his main point) it is wrong to get enthusiastic about the rise in self-employment and small businesses we are experiencing in the UK. In fact, we should be concerned that it is a symptom of a weakening economy.

I’m certainly not a dab hand at tables like Steven but I had a go using the data for 2010/2011 he recently employed himself. Here I’ve plotted the percentage of self-employment in the labour market for every OECD country against their GDP per capita.

blog gdp

At first glance, this table seems to uphold Steven’s point. Countries with low self-employment rates have higher GDP per capita while those with high self-employment are in the growth doldrums. But look closer and there is more nuance.

There are actually three groups on the chart:

1. Over on the left are two very low self-employment and very high GDP per capita countries. The two countries are Norway and Luxembourg.

2. Then there is a large group that has self-employment ranging from 7% to 17% and with GDP per capita of between $30,000 and $50,000 but largely centred on the OECD average which is just shy of £40,000. Group 2 is almost entirely made up of Western and Northern European economies (plus the US, Japan and Australia).

3. Finally, there is a group of countries with GDP per capita of between $15,000 and $30,000 with a much wider range of self-employment rates stretching from 8% right up to 36%.Group 3 is mostly made up of the developing nations of Eastern Europe and Latin America and the Southern European nations.

What does this tell us?

Firstly, that group 1 are outliers. Neither Norway nor Luxembourg have conventional economies: the first is heavily dependent on oil and gas exports for its income and the second has a population the size of Manchester’s and is dominated by its banking sector. Neither of these can tell us much about the relationship between self-employment and economic health.

Secondly, that self-employment rates are closely correlated to economic development (a fact that has been widely documented in the past). As countries become more advanced economically, their self-employment rates tend to drop.

Thirdly, that the Mediterranean economies are in a bit of a mess. Self-employment levels may bear some relation to this but it is clearly far from the whole story. Go back a decade, for example, and Italy was actually out-performing the OECD average for GDP per capita even though its self-employment rate was higher.

Finally, and most importantly, when an economy reaches a certain level of maturity it can exhibit a wide range of self-employment rates of between roughly 7% and 17% and that this rate does not correlate in any obvious way to performance within the $30,000 to $50,000 band.

So, the fact that the UK’s self-employment rate has seen an increase in the last decade of just over 1% to reach 14% is not necessarily a cause for concern. Of course, it also suggests it is not necessarily a cause for great celebration either.

Obviously GDP per capita is only one measure so I’ll be blogging more on this theme over the next few days and weeks. I also think there are shifts occurring in the labour market and business population which should worry us but that will also have to wait until another post because I need a lie-down after doing that chart. I don’t know how Steven does it!

 

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