Instead of driving up self-employment, the minimum wage has driven up pay for the self-employed

Published on Jobs, Skills and Pay

The introduction and subsequent ramping up of the National Minimum Wage (NMW) and National Living Wage (NLW) has not driven the rise in self-employed workers, but it might have affected their earnings despite not being entitled to it, according to the Resolution Foundation’s Earnings Outlook, published today (Monday).

The latest quarterly Earnings Outlook focuses on two of the biggest changes to the UK labour market over the past two decades – rising self-employment (from 3.4 million in 1999 to 5 million today) and the introduction and ramping up of the legal minimum wage (from £3.60 in 1999 to £8.21 today) – to assess whether the two trends are linked.

Some economists have argued that a rising minimum wage could see firms pushing more workers into self-employment as the legal minimum doesn’t apply to them. This theory is particularly relevant to the current labour market, given the ongoing ramping up of the NLW, and the fact that self-employment has accounted for almost half of all employment growth over the past year.

The Outlook assesses whether these worries have been born out in practice by examining whether self-employment has increased fastest in those parts of our economy most affected by the minimum wage.

The report finds instead that self-employment has actually grown fastest in some higher-paying sectors like finance and publishing (up 77 and 65 per cent respectively since 2009), while it has fallen in some low-paying sectors like food and drinks services, and agriculture, caring and sales occupations (down 27 and 13 per cent respectively).

The Foundation says that other factors, in particular lower national insurance rates for the self-employed, are likely to have played a greater role in the growth of self-employment.

The Outlook goes on to show, however, that the minimum wage may well have had a different effect on self-employment – by increasing how much lower-earning self-employed workers take home. It finds that the most common level of earnings for self-employed workers last year was equivalent to around £7.50 an hour – the same as the NLW. Prior to the minimum wage, there was no such spike in earnings around this level.

It also finds that, much like employee pay growth, earnings growth for the self-employed has been strongest for the lowest earners since the introduction of the minimum wage. Hourly real earnings have increased by 51 per cent for the bottom fifth of self-employed workers since 1999, compared to growth of around 15 per cent in the top half of the self-employed hourly pay distribution. Employee pay for the bottom fifth of earners has grown by a third over the same period, compared to 18 per cent for the top half of employees.

The Foundation says that this might be because, in a tight labour market, rather than firms being able to substitute employees entitled to the minimum wage for self-employed workers who aren’t, self-employed workers are able to choose higher wages by moving to employee jobs, thus increasing the going rate for low-paid self-employed work.

The Foundation says it is welcome that many self-employed workers may be indirectly benefit from the NLW, despite not being legally entitled to it. However it adds that experts like the Low Pay Commission should continue to monitor any link between the two labour market trends.

Finally, it says that with the typical self-employed worker still taking home the equivalent of just £8.40 an hour last year (just 57p above the NLW), and being twice as likely to be low-paid as an employee (37 per cent compared to 17 per cent) – the new government needs a low-pay strategy for the self-employed.

Nye Cominetti, Economic Analyst at the Resolution Foundation, said:

“One of the fears about the introduction and ramping up of the minimum wage has been that it would push low-paid employees into self-employment, where they’d have fewer rights at work and no entitlement to a legal wage floor.

“But in fact the minimum wage appears to have had more of an effect on the earnings of the self-employed, than it has on driving up self-employment. Much like employee pay, self-employed earnings have grown fastest at the bottom since the introduction of the minimum wage 20 years ago. Today, the most common hourly pay rate for self-employed workers is the same level as the National Living Wage.

“But with over a third of self-employed workers still in low pay last year, policy makers need to respond to the risks they face – including better statutory rights to help offset their highly volatile incomes, and more savings support.”