Sunday, April 27, 2014
Self-employed may hold key to rate hikes
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Today I want to talk about a subject dear to the hearts of many millions in Britain, 4.5m to be precise. I am referring to self-employment, which is booming, and which, for reasons I shall explain, may hold the key to the timing of when interest rates rise.

The rise of self-employment is one of the big stories of the recovery in the job market, and the changing nature of employment. There are now 700,000 more self-employed people in Britain, a rise of 18% compared with early 2008, before the economy slid into recession.

The optimistic view is that the banking meltdown and recession have resulted in a flowering of the entrepreneurial spirit. Faced with uncertain employment opportunities and the appeal of being their own boss, hundreds of thousands of people chose to turn the financial crisis into an opportunity.

Or, less benignly, could it be that pride has prompted many to describe themselves as self-employed when, to all intents and purposes, they are not employed at all? Could self-employment be the equivalent of some zero-hours contracts, except in this case, people spend many hours doing zero work?

It is a big question and, before answering it, let me provide a few more numbers. Much of the increase in self-employment, roughly half a million, has come in the past three years, though self-employment held up far better than employment – which dropped sharply - during the 2008-9 recession.

To put the 700,000 rise in self-employment since the eve of the crisis in perspective, the number of full-time employees, though rising strongly, is still some 200,000 below pre-crisis highs. The overall number of employees, admittedly, is up, though that reflects a rise in the number of part-timers.

To add a bit more statistical colour, the 1.15m rise in employment over the past three years divides into a 515,000 rise in the number of full-time employees, that 500,000 increase in self-employment and the rest - between 130,000 and 140,000 – in a rise in the number of part-time employees. Full-time employment during the recovery phase has kept ahead of self-employment, but only just.

What do Britain’s 4.5m self-employed do? Pretty well everything. Around 850,000 are in construction and civil engineering. Other big categories include retailing, 256,000; education, 246,000, building services and landscaping, 225,000; washing and dry-cleaning, 218,000; transport, 215,000; “human health” (including personal trainers), 188,000; farming, 175,000; legal and accountancy, 136,000; creative arts, 130,000; social work, 118,000, and architecture and engineering, 104,000.

Why does self-employment matter for interest rates? The Bank of England’s monetary policy committee(MPC) minutes for this month, released a few days ago, were significant because they were the last under Mark Carney’s original forward guidance, linking future interest rate changes to the unemployment rate.

Since the MPC met earlier this month the unemployment rate has dropped through the 7% threshold, falling to 6.9%, thus ending that first phase of forward guidance (while not prompting the Bank to think about a rate hike yet).

When it will do so, as was clear from the minutes, has a lot to do with if we should interpret t he rise in self-employment optimistically or pessimistically.

“A key question was whether the amount of slack in the labour market was understated by measured unemployment, as might be the case if many of the self-employed were underemployed and searching for work as employees.” the Bank’s minutes said.

There was “a range of views” among MPC members about whether the rise in self-employment was genuine, or a form of disguised unemployment.

If you are a hawk on the MPC, thinking about when to swoop for a hike in interest rates, you are more likely to think that the rise in self-employment is genuine. If you are a dove, and I would put Mark Carney, the governor, firmly in this category, you are more likely to question the self-employment numbers.

Though there is a range of views on the MPC, it has been hard so far when it comes to hawkishness to spot a sparrowhawk, let alone a golden eagle.

What is really happening to self-employment? Talking to the Office for National Statistics, which admits there is more it would like to know about the self-employed, several things stand out.

Most people do not flit in and out of self-employment, in response to redundancy or anything else. Self-employed people tend to be older than the average worker and have been doing it for some time, typically 10-20 years.

Why, if most are in it for the long run, have we seen such a strong rise in self-employment over the past few years? The ONS has an interesting explanation for this, which feels right. It is that many fewer self-employed have been retiring, perhaps because of inadequate pension arrangements or other factors. So, in the jargon, there have been fewer outflows from self-employment into retirement.

Combine that with a steady increase in the number of people becoming self-employed - the inflows - and you have the reason for the rise in numbers.

There are three other reasons to think the rise is genuine. The strong revival of construction and house-building would be expected to lead to a rise in the number of self-employed, and it has. Numbers of self-employed in construction and civil engineering are up more than 100,000 over the past 2-3 years.

The recent overall rise, moreover, has been concentrated in full-time self-employed people, up 243,000 in the latest 12 months, compared with a 54,000 rise in part-time self-employed. If self-employment was disguised unemployment, you would expect the biggest rise to be among people declaring themselves part-time self-employed.

Not only that, but self-employment is rising strongly even as more jobs become available, with a 100,000 increase in vacancies in the past year alone.

So, it looks genuine, and I suspect the MPC will come to that view too. Does that mean interest rates are about to go up? Not yet. I think the unspoken deal on the MPC is for no rate hike this year but that forward guidance will have served its purpose if there are rate rises next year. The question is whether that will come to be seen as too late.