Collapse in pay lies behind Britain’s return to work: Self-employed are hidden victims of recession, report warns

Self-employed earn fifth less than in 2008, and 40% less than typical employee

More than a quarter of people now classed as self-employed are hidden victims of the recession struggling by on low pay, a new report reveals.

The study by the Resolution Foundation think tank reveals the dark side of the sharp growth in self-employment, which has helped the Government to maintain its boast that unemployment is falling as more and more people find work.

Since the start of the recession five years ago, the number of self-employed has risen by 650,000 to 4.5 million. They now represent 15 per cent of the active workforce.

But the new analysis reveals that the average weekly income of someone in self-employment is 20 per cent lower than in 2008. As a result, a typical self-employed worker now earns 40 per cent than a typical employee. An Ipsos-Mori survey commissioned as part of the report also found that 27 per cent of those who became self-employed in the past five year do so because they had no other choice - up from 10 per cent five years ago.

Gavin Kelly, chief executive of the Resolution Foundation, said: “Self-employment is often a highly precarious existence which isn’t that well supported by public policy. High levels of self-employment seem likely to be here to stay and policy-makers have some catching up to do.”

The grim truth about pay and living standards in some the regions of the UK has also been highlighted by official EU figures showing that parts of Britain are effectively poorer that countries from former communist countries in Eastern Europe.

People in Cornwall and the Welsh Valleys are worse off than residents of Estonia and Lithuania, according to Eurostat figures comparing wealth across the EU using a measure known as “purchasing power standards” - which takes into account GDP per person and cost of living.

In addition, Durham and the Tees Valley, in the north east of England, are poorer than those in the wealthiest regions of Bulgaria and Romania, the two most deprived countries in the EU.

By contrast, the Eurostat figures show that London is the richest place in Europe.

According to the Resolution Foundation report, self-employed people are more likely than people in full time employment to complain of being under employed.

The report’s authors suspect that much of the drop in self-employed average earnings is caused by their working fewer hours, and by the increasing number of women who are self-employed.

London, where the well paid full time jobs are concentrated, has experienced the lowest proportionate growth in self-employed, while the highest increases have been in the north east of England and the West Midlands, where there is high unemployment.

The grim economic background means that many of the people classed as self-employed face an uncertain future, with no growing pension pot, and difficulties in getting mortgages and personal credit.

The Resolution Foundation report warns: “The analysis paints a worrying picture of the security and vulnerability of self-employed people on both a short and long term horizon.”

Mr Kelly, from the foundation, added: “The growth in self-employment over recent years has been astonishing – but the reasons for it are complex. Some of it can be explained by a workforce that is getting older and putting off retirement for longer, some of it may be down to our growing appetite for being our own boss, and clearly much of it is due to weakness in the jobs market meaning there are fewer other options.”

Labour’s shadow Business Secretary Chuka Umunna said: “This report shows that the cost of living crisis facing the self employed is often more acute than for others.

“That is why, unlike this Tory led Government, we will reduce the cost of doing business for the self employed by reducing the average small business’ energy bill by £5,000 with Labour’s energy price freeze, by improving access to finance with a British Investment Bank and regional banks, and by setting up a UK Small Business Administration to champion their interests at the heart of Government.”

The figures in the Eurostat report date from 2011, before the UK economy began to recover.

In the past quarter the UK has achieved an annual growth rate of 3 per cent, while the economies of the US, EU and Japan floundered. This inspired David Cameron to talk last week about a “great British revival”.

But the former US Treasury Secretary Larry Summers has dismissed the idea that these figures are a vindication of the Government’s austerity programme.

Writing for the Washington Post, he claimed: “While recent growth has been rapid this is only because of the depth of the hole Britain dug for itself.”

A Department for Work and Pensions spokesman said: "Of the 691,000 extra people who have found work over the last year nearly three fifths are employees of firms. But small businesses and entrepreneurs are the heartbeat of the continuing success of the country and as the economy grows, these self-starters may well become the employers of the future.

“The truth is the number of people in work has increased by 1.35 million since 2010 - over a million of these jobs are full-time. We now have the highest employment rate for five years and record numbers of people are in work.”