In theory Universal Credit is a dream policy. The idea has been to streamline the welfare system, rolling six means-tested benefits into one so that work will always pay. UC is also intended to make the transition in and out of benefits more seamless, and as such accommodate workers whose income fluctuates and who find themselves flitting between jobs. In 2012 DWP estimated that an extra 300,000 more workless households would move into employment as a result of UC, and that it would save £38bn over 12 years from its inception.
Yet as we all know, the hype has not lived up to reality. Universal Credit has proven to be something of a nightmare. Indeed, it is hard to overstate the problems that have beset this flagship welfare scheme. IT failures, civil servant departures and a lack of departmental resources are just a few of the reasons for Universal Credit’s woes. Such are the challenges facing the £2.4bn scheme that the Major Projects Authority in Whitehall decided it needed to be ‘reset’ in 2013, while £34m of new IT assets had to be written off as a result of unexpected difficulties. To top this off, a damning National Audit Office report noted that ‘throughout the programme the Department [DWP] has lacked a detailed view of how Universal Credit is meant to work’.
Last week I argued that the concerns over shrinking self-employed earnings may be a little exaggerated. Coincidentally, at the same time the blogger Flip Chart Rick convincingly proposed the opposite: that we aren’t half as worried as we should be.
Clearly the jury is still out. So while we’re in the debating mood it might be worth adding another layer to the debate – that of wealth and asset ownership.
As part of our new project with the Joseph Rowntree Foundation, we’ve been looking at the data on earnings, wealth and debt. And while some of the findings are unsurprising, there are a few curveballs in there too.
Here are a few initial observations to chew over:
#1 – The full-time self-employed earn around 20 per cent less than their employed counterparts, and their income has fallen by 10 per cent in real terms since 2000
This week the ONS published a brief report on the rise in self-employment. The headline is that the number of people working for themselves has reached a record 4.6 million, the equivalent of 15 per cent of the workforce. This is the highest figure since records began 40 years ago.
Yet it wasn’t the aggregate numbers the media paid attention to. It was the stats on their earnings, which the ONS report had fallen by 22 per cent in real terms between 2008 and 2012 – quite a staggering fall. Others have highlighted a similar trend, including ourselves and the likes of the Resolution Foundation. In short, the message of the data is that while being your own boss may be more fulfilling, it can also be financially precarious.
While I broadly subscribe to this position, I do increasingly wonder whether we may be exaggerating the income crashes and shortfalls of the self-employed. Here are three reasons why:
This week the RSA and the Joseph Rowntree Foundation launch a new project exploring the living standards of the self-employed. Over the course of the coming months our aim will be to pinpoint the particular economic and social challenges facing people who work for themselves, consolidate emerging thinking around how these might be addressed, and build up a network of support organisations willing to collaborate on the development of practical and policy interventions. The rationale for the project is unpacked below.
Self-employment in the UK is growing rapidly. Since the turn of the century there has been a 30 per cent increase in the number of people working for themselves, which equates to an extra 1.4m workers. The result is that 1 in 7 of the workforce are now self-employed – one of the highest figures in living memory. Nor does this trend show any sign of coming to an end. Over the last 6 months alone an extra 300,000 more people have turned to self-employment. Should these rates continue, the RSA predicts that the number of people who work for themselves will soon be greater than the size of the public sector workforce.
The fact that this community is growing is seldom contested. Where there is disagreement, however, is in what lies behind the boom and whether the growth in self-employment is a ‘good thing’ for those involved, as well as for the nation as a whole. For some, the increase witnessed in recent years is a sign of a fragmented labour market and a deeper malaise in the wider economy. For others, the trend is indicative of a resurgent entrepreneurial spirit in the UK, and as such should be welcomed and actively supported.
Ever heard of Bertrand’s theory of economic competition? You should have, because we’re entering the era of the Bertrand economy on steroids.
His theory is a simple but profound one: when firms produce almost identical products they will compete by reducing their prices until they reach the marginal cost of production (the cost of making each unit of the good). Think of two bike shops vying for customers, both of which chip away at their prices tit-for-tat until they hit the cost of making each bicycle.
To this day, however, Bertrand’s theory has remained exactly that – a conceptual model that economists tinkered away with but the wider world duly ignored. The reason? Because it rested on a number of assumptions that have been implausible ever since he formulated the model in the 1880s. Namely that customers have all the information to hand about the prices and quality of products, and that they are within distance of all the businesses selling the item in question.
The RSA has a new narrative called the Power to Create that will define our work over the coming years.
Simply put, this is about enabling more people in more places to realise their ideas and shape the world around them – or, in the recent words of Matthew Taylor, ‘to be authors of their own lives’. In practice this could mean anything from starting a business, to running a campaign, to shaping the delivery of public services. One of the best examples I’ve come across recently is that of the students at Manchester University, who took it upon themselves to challenge (and offer an alternative to) the neo-classical economic theories that were dominant in their teaching.
We may quibble over definitions and semantics, but I doubt anyone could really disagree with the sentiment behind the Power to Create. The real question is how to nurture this capability. Over the course of the 20th century the consensus was (and still is) that the ability of people to ‘get ahead in life’ is fundamentally determined by the quality of their education – technical but also generic. Blair’s mantra of education, education, education epitomised the widespread view that with a few qualifications and a university degree the world is yours for the taking. It’s one reason why education remains such a politically toxic arena, from the debates over grammar schools to the backlash against rising university tuition fees.
With all the talk of start-ups and self-employment, you’d be forgiven for thinking that the days of the big business are numbered. But as it turns out, they’re undergoing something of a revival themselves.
A quick look at the data from the Inter-Departmental Business Register shows that the two business types with the fastest growing population sizes are those with 0-4 employees and… 1,000 plus employees (see graph below). In other words, it’s the very small firms and the very large ones that are becoming more prominent in our economy. (The IDBR isn’t as reliable as the Business Population Estimates, but it gives a more detailed breakdown of the population sizes among larger firm groups).
How do we improve the living standards of the self-employed?
Despite the fact that 1 in 7 people now work for themselves, this is a question that is seldom asked. Too often our attention is focused on how to support the business itself rather than the individuals behind the business. For example, we spend a great deal of time thinking about how to channel more finance to small businesses, and how to pare back corporation tax and regulatory burdens. But rarely do we consider how the self-employed can be better helped to access mortgages, pensions, housing and so on in their day-to-day lives.
This is a major gap in policy thinking and something the RSA plans to look at over the coming months as part of our Power of Small research project with Etsy. One of the most obvious issues that has come up time and again within our desk research and conversations with the self-employed is that of minimal insurance take-up. This includes things like public liability insurance (protection against lawsuits and malpractice complaints) but more importantly income protection insurance (cover against loss of income as a result of long-term health conditions).
Anyone who has heard of the ad man-turned-politician Maurice Saatchi will know he is a colourful character. So too it seems is his latest flagship policy.
Last week Lord Saatchi launched a new report with the Centre for Policy Studies calling for the abolition of corporation tax for small businesses with fewer than 50 employees. Corporation tax, for those unaware of it, is currently levied at a rate of 20 per cent on profits under £300,000 (a higher rate is charged on profits that exceed this amount). The rationale for the tax break is that small businesses would funnel a large part of the extra cash back into the business, either in the form of capital investment (machinery, tools etc.) or employee compensation (paying staff more or taking on new staff). The CPS report says it would cost the exchequer a small amount up front, but this would soon be recouped in the form of stronger economic growth and tax receipts.
Writing in the Daily Telegraph, Lord Saatchi puts it more spiritedly:
The Policy, as I call it, would therefore abolish corporation tax for 90 per cent of UK companies, reduce the deficit faster than predicted by the Office for Budget Responsibility (OBR) , expand employment faster than it predicts, increase competition, challenge cartel capitalism and let millions of people grow tall.
Ever get the impression you’re rearranging the deckchairs on the Titanic?
It’s the first thought that comes to mind when delving into David Harvey’s new book, The Seventeen Contradictions of Capitalism.
To be sure, it’s not an easy read. Harvey’s lack of practical examples to ground his abstract arguments mean they struggle to stick, and I found myself having to re-read paragraphs multiple times before I fully understood his points. But with a bit of time and effort the Marxist lens with which he uses to view the world eventually comes into focus.
True to form, he dissects our capitalist system with precision and goes where few other academics dare tread. Indeed, the very point of the book is to bring to the surface everyday ‘fetishisms’ – masks, disguises and distortions – within capitalism that conceal how the world truly operates. Money, for instance, is highlighted as a prime example of something that tells us little about the creation and true value of everyday commodities.
Harvey’s task, as he puts it, is to get behind these fetishisms and reveal the profound contradictions at play within the economic (and social) engine that powers capitalism. Harvey lists seventeen in total, all of which capture – to varying degrees – elements of the capitalist system that are inherently self-defeating.