British Find Ways to Beat Working for a Boss

Katie Elfer wanted to work. Just not like this.

Her marketing job at American International Group Inc. required her to wake up at 5 a.m. to commute to London from seaside Brighton, leaving her exhausted when she returned to get her son from day care at 5:30 p.m. She quit in 2012 and developed Cookery Doodle Do, which provides children’s cooking classes. Her office is one floor above the nursery where her second child is enrolled.

“I absolutely loved my job and was on a really good salary,” said Elfer, 31, said as she crouched over her computer keyboard answering questions from franchisees through her website. “But I was miserable. Now I can do a really exciting day job and get that stimulation and responsibility. Then I can leave when I need to collect my son.”

Elfer is one of more than 702,000 people who have started working for themselves since the recession began in 2008, a gain that represents 70 percent of the pickup in employment over the period. The increase has persisted even as the U.K.’s economic recovery would be expected to be luring people back into salaried work.

There’s no clear reason, such as a major policy change, that explains why self-employment has gained, said Ian Brinkley, an economist at The Work Foundation at Lancaster University in the U.K. The last time a British recession ended, in 1991, there was little self-employment growth so it wasn’t much of a focus for economists, he said.

Record Employment

“In this recovery, where such a large share of the jobs are in self-employment, it’s become much more important for trying to understand the changes going on in the labor market,” he said.

The increase comes as employment rose to a record 30.5 million in the three months ending in April, while the unemployment rate is at a five-year low of 6.6 percent. That compares with a euro-area unemployment rate of 11.6 percent.

In Britain the number of self-employed has climbed to 4.5 million, a record 15 percent of total employees. Figures from the Paris-based Organization for Economic Cooperation and Development using 2011 data showed the U.K. had the second-highest self-employment rate in the Group of Seven nations, exceeded only by Italy. The U.S. had the lowest rate.

Skill Set

“Given the size in the fall of GDP in the U.K. you would have expected much larger increases in unemployment than actually occurred,” said Jonathan Ashworth, an economist at Morgan Stanley in London. “Quite a large proportion of the gains in employment were driven by self-employment. In the absence of job opportunities at firms, that can help workers maintain their skill set and connection to the labor market.”

Elfer says she’s reinvesting the money the business earns and has attracted franchisees. In three years she expects to be earnings about the amount as when she left AIG. Barring unforeseen disasters, she says, she wouldn’t trade her position for substantially more pay as an employee.

The question for policy makers is whether a large share of these workers is like Elfer and thus prefers to stay put. Fewer applicants seeking jobs at companies as they become available may support arguments that the labor market doesn’t need much more stimulus and the Bank of England can raise rates sooner.

Daniel Vernazza, an economist at Unicredit Bank AG in London, says he doesn’t see evidence of big demand among the self-employed to start toiling for someone else. His analysis of official data shows just 2 percent of such workers were seeking a job as an employee in the second quarter last year, up less than a percentage point from a decade ago.

“The Bank of England should only worry if self-employment were a proxy for unemployment, and there’s no evidence of that,” he said. “There’s not a lot of slack in the economy.”

Dwindling Pension

Paul Murray says he’ll never go back to a salaried job. Six years ago, at age 59, he looked at his expected pension and saw that it was a fraction of what he’d anticipated when he started contributing a quarter of a century ago. With his planned retirement date a few years away, he knew his only choice to maintain the standard of living he and his wife were expecting was to keep working.

Then the management changed at the employment law consulting firm where he’d worked in Manchester for 13 years, and he decided the best option was to strike out on his own. Murray started his own firm in 2012 and now, at age 65, he says he’ll work as long as he can -- on his own terms.

“I’ve found my niche in life,” he said. “There’s no way over my dead body I’d take paid employment again.”

Murray said he makes about as much money as he did in his salaried job. That may make him an exception, according to recent research by the London-based Resolution Foundation, a research institute.

Earning Less

Its analysis of the U.K.’s Family Resources Survey, which includes about 20,000 households and has been running since 1992, showed the self-employed earned about 40 percent less than the typical employed person in 2011-2012. That compares with 20 percent in 2006-2007. Resolution says pay of the self-employed isn’t as well understood as for employees and timely data is less readily available.

That leads Resolution analyst Conor D’Arcy to speculate that some of those who like working alone nonetheless may return to salaried work as the economy improves.

“If there are employee vacancies, people who’ve taken a big hit in self-employment income will see the shift as attractive,” D’Arcy said.

A survey by the group and polling organization Ipsos Mori of people who became self-employed in the last five years showed that about 28 percent would prefer to be an employee. Among those who’ve been working for themselves for longer, the figure is even lower: 11 percent.

Inflation Pressure

The BOE has pored over the labor figures to see how much scope there is for people to become more productive before a tight labor market feeds inflation pressures. The Work Foundation’s Brinkley said the lower income and productivity associated with the newly self-employed may suggest a weaker recovery in overall U.K. productivity in the coming years.

Productivity is down 4.3 percent since the start of 2008, official data show, and “a substantial part” of that weakness is due to self-employment, said Michael Saunders, Western Europe chief economist at Citigroup Inc. in London.

Central bank governor Mark Carney told lawmakers on June 24 that the self-employed may account for “some but by no stretch all” of spare capacity in the labor market. He said the Monetary Policy Committee wants to see “wasteful spare capacity concentrated in the labor market” get used up as it gauges the appropriate time to remove stimulus from the economy.

No Return

For Sarah Brockwell, 43, who started a business in 2010 after being let go from her banking job during the financial crisis, the potential means she’s unlikely to return to salaried work. She started sarahBee marketing in Essex, England with 250 pounds ($427) she’d earned from selling her maternity clothes on EBay, and now has annual revenue of about 60,000 to 80,000 pounds.

“I like the flexibility that self-employment gives you and I like to be in charge of my own destiny,” she said. “Because the business has been so successful so far I wouldn’t want to just hand it over to someone else.”

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE