Can self employment be a route out of poverty for low-paid workers?

Self-employment can be an opportunity but, says Helen Barnard, many people are doing it because they can’t find secure jobs. Research from the Social Market Foundation published today shows how self-employment could be made a better option for people on low incomes.

One of the most striking trends about the current labour market is the increasing number of self-employed people: one in seven of the workforce is now self-employed. 14% of jobs are now full-time self-employed jobs and less than a fifth are part-time self-employed jobs. Self-employment and entrepreneurship are a vital part of our economy and should be supported and celebrated. But too many self-employed people struggle to make ends meet.

The experience of many self-employed people does not reflect the image of the vibrant entrepreneur developing and growing an innovative, high-earning business, as often depicted by politicians. Many self-employed people work in low-paid industries, like cleaning or taxi-driving, and are unlikely to employ anyone else or grow into a bigger business. The typical self-employed person earns 40% less than an employee and is more likely to live on a low income. During the recession, many more people became self-employed, but income from self-employment fell much more than employees’ wages.

New research today by SMF shows that some people are being pushed into self-employment by unemployment, low pay and less progression at work. Rising numbers of self-employed people can mask a lack of decently-paid jobs. This is reflected in high numbers of self-employed people from some ethnic minority groups that experience high unemployment and low pay. Overall, four out of five low-paid workers remain stuck in low pay after ten years. Problems facing all low-paid workers are exacerbated by discrimination and workplace cultures which exclude some workers from opportunities. A 2009 DWP study found that an ethnic minority person needed to make 16 job applications to get an interview, compared to nine for a similarly qualified white person.

Self-employment is not always a better alternative for those on low incomes. Better and more flexible jobs would provide more stability for those at the bottom end of the labour market. Recent research from the RSA also made a range of recommendations to help self-employed people cope better with fluctuations in income and improve their support through the welfare system.

Those who would like to go into self-employment may face barriers, in particular within Black African and Black Caribbean groups. Policies such as the New Enterprise Allowance and start-up loans are making a difference. Policy makers and employers need to work together to open up access to good jobs and tackle direct and inadvertent discrimination that keeps too many people from ethnic minority groups trapped in low pay and poverty.

Other self-employed people need support, training and advice to help them into better paying jobs – changing their business or finding better work as an employee. Employment and careers services should pro-actively provide advice for self-employed people on low incomes, either to improve their business or move into a better job. Self-employment can be the basis of a secure, profitable career, but more needs to be done to make sure that it is not a last resort for people who struggle to find better employment options elsewhere.