1779110_10151934140752411_1942612945_nIn this post we will show how the ‘improved’ employment figures mask the reality of employment for millions of workers. In particular, we will look at the decline of productivity, the growth in self-employment and the use of payroll companies. All of which helps to understand the continuing cost of living crisis.


Ed Miliband and Ed Balls have frequently argued not only that London and the south east have benefited disproportionately from renewed economic growth but also that a cost of living crisis for low and middle incomes remains endemic across the country.

This has not stopped Chancellor, George Osborne and his Lib Dem sidekick, Danny Alexander, making much of Britain’s apparent return to economic growth after years of double dip recession and growth flatlining. Measured in terms of the Gross Domestic Product (GDP), the last quarter of 2013 showed an increase of 0.7% over the same period in 2013. The employment figures look encouraging too.

On the face of it, this sounds like good news but we have read the small print and all is not what it seems – especially if you are a construction worker or cleaner in a care home.

So what does the small print say?

GDP, the sum of all goods and services produced in the economy, including the service sector, manufacturing, construction, energy, agriculture and government, is the most important indicator of the country’s economic performance.

What is seldom noted, however, is the relationship between GDP and the size of the population. Britain’s population is growing steadily. In principle, growth in the size of the economy ought to match growth in the size of the working–age population. The term used to describe this relationship is productivity or, to use economic jargon, Capita Gross Domestic Product (Capita GDP). In short, we can only judge economic growth in the context of employment.

A report published on 7th April 2014 by the Office for National Statistics showed that productivity in Britain remains substantially below its peak in 2008. Indeed, the gap between GDP and capita GDP appears to be increasing. (See the report at: http://www.ons.gov.uk/ons/dcp171766_358477.pdf)


The key question is this: if employment rates are relatively good, i.e. there are more people in work, then why are productivity rates so poor?
The answer lies in the fact that the employment figures, published by the ONS, include but do not discriminate between people employed on zero-hours contracts, part-time contracts, full-time contracts or are self-employed.

The ONS statistics treat a person on four hours per week on a zero-hours contract as equivalent to a person employed full-time for 36 hours each week. Statistically they are recorded the same. So, nine workers on four hour zero-hours contracts are the equivalent of one person working 36 hours per week although the same economic value is produced in each case. In the first case the figure recorded is nine employees and in the second the figure recorded is one employee.

With the growth in the number of people on zero-hours and part-time contracts it is no wonder the statistics look good. In previous posts we have written at length about zero-hours contracts and part-time work, here we are concentrating on self-employment.

James Plunkett, director of policy at the Resolution Foundation, says the shift towards self-employment has been one of the untold stories of the downturn. (http://www.resolutionfoundation.org)
The ONS report referred to earlier shows that, excluding those on zero-hours contracts, 613,000 more people were in work during the final quarter of 2013 than in the first quarter of 2008, i.e. the beginning of the recession.

However, this impressive overall rise obscures some very significant features:
– throughout this period the number of people who were self-employed increased by approximately 510,000;
– the self-employment share is age-related. It rises smoothly through the age groups from around 5% of total employment for those aged 18 to 24 to around 38% of those aged 65 and above.
There are approximately 4 million self-employed businesses in the UK of which only 100,000 are registered for VAT purposes. However, although the number of self-employed workers has risen, their average earnings have fallen.

The available statistics on self-employed earnings are complex. However, whether or not we use HMRC data or ONS data, the decline in average earnings, taking inflation etc. into account, has been measured as falling by around 30%. (For further details see: http://www.taxresearch.org.uk/Blog/2013/12/03/the-fast-disappearing-income-of-the-uks-self-employed/#sthash.dBEWaWso.dpuf)
So given that the earnings of the self-employed have crashed why has their number increased? This is an incredibly difficult area to research but there are number of possible reasons. One explanation that is of particular concern involves what is called bogus or false self-employment. This is found in a number of work sectors, for example in construction and the social and administration sectors.


UCATT, the construction industry union, claims false self-unemployment is the biggest employment rights challenge in construction. It is used by many employers to evade taxes and engage workers without having to respect employment rights and entitlements such as holiday pay, sick pay and pensions. It is immoral though not illegal. It is rife in the transport and construction industries. (See: http://www.ucatt.org.uk/false-self-employment)

The union estimates over 50% of those working in the industry are falsely self-employed. It puts much of the blame on the use of the Construction Industry Scheme (CIS) which sets out rules for how payments to subcontractors for construction work must be handled by contractors in the construction industry.

UCATT claims false self-employment is widely used to the benefit of construction companies and those companies that have a high spend on construction because it allows the companies to deduct tax at source and not through the PAYE payroll system. Construction companies frequently outsource their payroll function to payroll companies.

According to UCATT’s report ‘The Great Payroll Scandal’ false self-employment is estimated at costing the Exchequer £1.9 billion per annum. (See: http://www.ucatt.org.uk/search/node/the%20great%20payroll%20scandal)
Before the 2010 general election, the Labour government had planned legislation to end the practice but with the victory of the Lib Dem and Tory collation government the chance of legislation disappeared.

Labour are now committed to implementing a policy that will see workers presently registered as self-employed through CIS returned to the PAYE system unless they meet strict criteria to prove that they are self-employed.

Social and administrative sector

Perhaps the fastest and largest growth sectors in which false self-employment is rife are in clerical, cleaning and caring work. These are all areas in which predominantly women are involved. Scarlet Harris, spokesman for Women’s Budget Group, argues: “These women, who already suffer poverty rates of pay, are now having to contend with the poor working conditions and complete lack of job security that self-employment brings. These shocking gender pay gap figures should end any delusions people have about the UK’s four million self-employed workers.” (http://www.wbg.org.uk/)

Once again large companies use payroll companies that operate by requiring a worker to sign a contract stating they are self-employed. In many cases the worker in reality still works for a single employer but will be denied all the rights of an employee. To add insult to injury the worker is usually expected to pay for the payroll company’s services with a weekly charge (usually £15-£25 after tax) that is taken directly from their wages.

Why employ one person when five will do?

In order to achieve the holy grail of a flexible labour market the government is turning a blind eye to the desperate plight of workers who are falsely self-employed often through payroll companies. A flexible labour market needs workers with no ties and who are always available and will put up with no work entitlements. Construction companies, care home companies and cleaning companies want a reserve army of labour. They need ten workers on their file so that they can rely on one always being available. There might actually be enough work for two or three workers but it is prudent not to have to employ any of them on a full-time basis. And, in this way ten workers appear in the employment figures as employed but actually they are all underemployed.

So this is how it works:
– The employers get a flexible labour market!
– The government maximises its employment figures!
– Workers get screwed.

Richard Murphy of tax Research UK expresses this very well:

“The fact is we now have maybe millions of people working in very marginal self-employments for what are poverty wages because they have no other choice available to them. This is not entrepreneurial Britain and the march of the makers as some would like to represent, this is desperation Britain where people left with no choice scratch any living they can out of the limelight and, until now, out of the sight of economic statistics.

“In a culture where only the best are rewarded, where cut-price is everything, and where low pay is officially applauded as a sign of productivity life for many self-employed people is very tough. These people are the hidden unemployed and the hidden low paid. They’re self-employed because the safety net has been pulled from underneath them.” (See: http://www.taxresearch.org.uk/Blog/2013/12/03/the-fast-disappearing-income-of-the-uks-self-employed/#sthash.dBEWaWso.dpuf))

Britain Can Be Better Than This


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