Why a sharp increase in self-employment isn’t always good for growth

SINCE 2008, Britain has seen a jump in the numbers of self-employed, a category that includes both “own account” self-employed and business owners. Between 2008 and 2012, an extra 367,000 people joined the group, and today’s Office for National Statistics (ONS) employment figures are unlikely to reverse the trend. It looks like good news for the economy and for the government, which aims to make the UK one of the best places in Europe to start a business. Entrepreneurship can unleash innovation and growth, and provide employment. But it’s not all like this.
Just as there is a huge range in what different jobs contribute to the economy, there is also high value and low value entrepreneurship. High value entrepreneurship drives innovation, boosting productivity and job creation. And a significant part of this value can be traced back to the motivations for becoming an entrepreneur in the first place. Those motivated by opportunity – who start up because they have seen a profitable opportunity to exploit – are different from those who are driven by necessity, because they have few other options. And research by professor Zoltan Acs, previously of the US Small Business Administration, shows that it is opportunity-driven entrepreneurship that is good for economic growth, not entrepreneurship per se.
Opportunity-driven entrepreneurs are likely to be highly skilled and experienced, often in the area they choose to set up their business. They may have to give up valuable employment opportunities to become entrepreneurs.
But the UK’s rise in self-employment has taken place against a backdrop of weak growth. Global Entrepreneurship Monitor statistics show that the proportion of new entrepreneurs in the UK driven by valuable opportunities has fallen – from a high of 61 per cent in 2006 to 43 per cent in 2012. And ONS figures show that a falling number of self-employed people employ other workers, suggesting that the rise in self-employment is not translating into new, thriving businesses.
Self-employment is better than no employment. But that doesn’t mean that we should celebrate its rise as evidence of a vibrant economy. Creating an innovative entrepreneurial sector means focusing on expanding high value entrepreneurship, and broad-brush policies risk pushing those who are least equipped to add value into starting their own firms. Researchers at the University of Warwick found that, in less prosperous areas of the UK, policies to increase firm formation had a negative impact on long-term employment, as those who started new companies had low skills, few other options, and poor market prospects.
This should serve as a cautionary tale. The government recently announced that 50 per cent of startup loans in England went to 18-30 year olds who were previously unemployed. But entrepreneurship is not always the best route out of unemployment for those without the right skills and experience. If we’re interested in entrepreneurship, we must recognise that not all entrepreneurship is good.
Kitty Ussher is chief economic adviser at Portland and a former Treasury minister. Nida Broughton is senior economist at the Social Market Foundation.

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