Self-employment

There is a modestly large body of literature that examines the emergence of dependent self-employment, also known as fake, false, or faux self-employment, and the changes in the labour laws that enabled it. A relevant search on an online scholarly database will typically return over a thousand results. An example would be the research article by Román, Congregado, and Millán (2011), Dependent self-employment as a way to evade employment protection legislation.

We are now faced with an additional phenomenon: the rise of the faux wage-employee. However, in contrast to the faux self-employed, this one will hopefully last only as long as the furlough scheme is in place. Nevertheless, it will likely create an uncomfortable situation for these wage-employees who will probably see their skills stagnate, deteriorate and leave these wage-employees in a state of “limbo” as another article eloquently put it. How can the rise of the number of people in wage-employment during the pandemic be explained? Not only the share of wage-employment increased, but at the same time the share of self-employment fell. Where did all those salaried jobs come from in the middle of a pandemic lockdown?

What is more, there are so many businesses in a nirvana-like state, that are about to wake-up in a new reality than the one they experienced until 2020, simply because the market changed in the past year in the process of adapting to the demands of the pandemic. Several firms have borrowed money to stay alive during the pandemic, which according to the Finance minister Rishi Sunak, will be able to spread the loan repayments over 10 years. Also, Britain’s Office for Budget Responsibility estimated in November last year, that is Nov 2020, that defaults on the programme would cost the government 27 billion pounds. An article published earlier this year by Reuters argued that the UK COVID lending risks creating zombie firms.

“businesses would be able to spread loan repayments over 10 years, rather than six, and to delay starting repayments by a further six months”

Rishi Sunak
The emergence of ‘zombie’ firms captured the news headlines during the 2008 crisis, but the theme is older than that and goes back to the Japanese economic climate of the 1990s. One needs to understand that the preservation of social structure is very important for the Japanese, and the Japanese employment practice is traditionally founded on lifetime employment. Letting employees off has a big social impact for firms and reflects badly on the government. Hence, low productivity firms were kept alive at the margins of exit by loose bank lending policies despite worsening business conditions to preserve the Japanese ways of life. In Japan they refer to the 1990s as “the lost decade”.

One can see how the furlough has put the UK economy in a similar situation. Now, let me just say that putting in place a mechanism that supports failing incomes during an economic crisis is good policy. Let me also say that this was uncharted territory for most governments in the global West. However, the scheme had more loop-holes than swiss cheese. Employees and employers alike worked out ways to exploit the system.

“If an employee has had multiple employers over the past year, has only worked for one of them at any one time, and is being furloughed by their current employer, their former employers should not re-employ them, put them on furlough and claim for their wages through the scheme”

      HM Revenue & Customs

Economists and sociologists call several themes that manifested during this pandemic “puzzles”; wage-growth puzzle, unemployment puzzle, productivity puzzle and so on and so forth. Predicting the behaviour of inanimate objects is characterised by a high degree of accuracy, but as a wise man once said “We hit a stumbling block when humans are involved”. People will find a way to exploit opportunities, behave selfishly, irrationally, and in whichever way they perceive it serves their interests at the time. Many likely chose to switch from low paid self-employment work to wage-employment so they could take advantage of the furlough scheme, others found ways to get registered as wage-employees with former employers to avoid unemployment or inactivity. I suspect that some people got two salaried jobs and were furloughed in both jobs. Many will find themselves unemployed when the furlough scheme comes to an end, with deteriorated skills and diminished employability.

References

HMRC, (May 2020). Support for businesses and self-employed people during coronavirus. https://www.gov.uk/guidance/check-which-employees-you-can-put-on-furlough-to-use-the-coronavirus-job-retention-scheme

ILO, National Labour Law Profile: Japan. https://www.ilo.org/ifpdial/information-resources/national-labour-law-profiles/WCMS_158904/lang–en/index.htm

OECD, (Dec 2016). The Global Productivity Slowdown, Divergence across Firms and the Role of Public Policy. https://www.oecd-ilibrary.org/economics/the-best-versus-the-rest_63629cc9-en

ONS, (May 2021). All data related to Labour market overview, UK: May 2021. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/may2021/relateddata

McGowan, M. A., Andrews, D., & Millot, V. (2017). The walking dead?: Zombie firms and productivity performance in OECD countries.

Román, C., Congregado, E., & Millán, J. M. (2011). Dependent self-employment as a way to evade employment protection legislation.