The Self-Employed: Greater Numbers And Growing Inequality

01 Mar 1997

There has been a huge rise in the number of self-employed people in the UK since the early 1980s: their proportion of the workforce has risen from 8.5% to 12% and they now account for roughly 10% of total household income. At the same time, income inequality among this group has almost doubled and is likely to continue to grow. What''s more, the percentage of self-employed people on zero or negative incomes has grown from less than 1% to over 6%. These are the findings of Simon Parker of the University of Durham in an article published in the latest issue of the Economic Journal.

Income inequality in the UK has risen dramatically since the early 1980s and one of the prime causes has been the pronounced increase in the inequality of self-employment incomes. There are two possible explanations for this. One is that an increase in the supply of self-employed workers drove down returns in the self-employed sector, affecting the poorer self-employed more than the rich. The other is that characteristics of the selfemployed became more varied, widening the range of jobs they perform and hence their income dispersion.

According to Parker''s analysis, the first explanation cannot be true: the widening income dispersion of the self-employed has not occurred because of their greater numbers. But the second explanation, that there is greater heterogeneity in the characteristics of the selfemployed, receives considerable support. A measure of the inequality of managerial skills among the self-employed reveals a striking rise in skill inequality, which has increased
overall inequality in self-employment incomes.

New entrants to self-employment in the 1980s had different characteristics to the existing stock of self-employed people. In particular, between 1981 and 1991, there was a 78% increase in the number of female entrants; an increase in the number of young and formerly unemployed workers; and a greater diversity in the occupations chosen by new entrants. The service sector played a particularly prominent role here: the number of self-employed
people in the sector more than doubled over the period, with an increase in both relatively low paying service jobs and high paying specialised banking and financial services jobs.

Parker's findings have three main implications:
• Government efforts to encourage self-employment in the 1980s cannot be blamed directly for the increased inequality of self-employment incomes, although they may have had the indirect effect of encouraging entrants with diverse characteristics.
• Since the self-employed have more unequal incomes than employees, the increase in self-employment during the 1980s has increased aggregate income inequality.
• Women currently constitute only a quarter of the self-employed and their incomes are considerably more unequal than those of self-employed men. The likely continuing growth in their self-employment participation suggests that the trend of increased self-employment income inequality has further to run.

''The Distribution of Self-Employment Income in the United Kingdom 1976-1991'' by Simon Parker is published in the March 1997 issue of the Economic Journal. Parker is in the Economics Department at the University of Durham. Material used in the analysis came from the Family Expenditure Survey through the Economic and Social Research Council Data Archive.

Simon Parker

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