The report finds that the rise of insecure work in the past decade means the public finances have missed out on £5.3 billion in taxes.
The negative impact of increased self-employment on the public finances is around £3.4bn, compared to £1.9bn for the impact of increased zero-hours contracts.
This is down to:
In recent years the idea that work is growing more insecure has risen up the policy agenda. The TUC has documented the growth in insecure work in recent years in its recent report Living on the Edge: the Rise of Job Insecurity in Modern Britain.
The current report addresses an important dimension of work insecurity not addressed in previous TUC work, which is the fiscal impact of insecure work on the public finances. This impact has two components:
The aim of this report is to estimate the size of the 'fiscal gap' which occurs due to increased levels of insecure work. We model the impact of two changes in the UK labour market which occurred between 2006 and 2016:
Analysis of data from the UK Family Resources Survey shows that self-employed people have lower earnings than employees across almost the whole of the distribution of weekly incomes from work (with the exception of the very top of the distribution). At the median – in the middle of the earnings distribution – self-employment earnings are 36 per cent lower than employee earnings, not controlling for other factors which affect earnings (such as age, gender, qualifications, occupation and industry). When these other factors are controlled for, the median pay penalty is slightly higher, at 44 percent. The gap between self-employed incomes and employee earnings is larger (in percentage terms) lower down the distribution of weekly earnings.
Analysis of data from the UK Labour Force Survey shows that employees on ZHCs earn between 55 and 70 per cent per week less than employees on other types of contract across the whole distribution of earnings, not controlling for other worker and job characteristics. When other characteristics are controlled for, the median weekly pay penalty for ZHC workers compared to other employees is 37 percent. The penalty is smaller in percentage terms at higher points in the distribution, and bigger below the median.
The income tax system in the UK treats employees and self-employed workers the same in terms of headline rates on earnings. However, the National Insurance Contributions (NICs) system is more generous for self-employed people than employees. Whereas employee earnings are subject to Class 1 Employee and Employer NICs, self-employed workers who are registered as 'sole traders' pay Class 4 NICs at a much lower combined marginal rate than Class 1 NICs. Meanwhile, self-employed people who have incorporated their own business ("owner-directors") do not pay any NICs on dividends paid out of company profits. These differences in tax mean that self-employed people pay a lower combined income tax and NICs sum on earnings above the lower limits for NICs. For example, given annual gross earnings of £30,000, a sole traders' income tax and NICs liability is around 37% lower than an employee's, while an owner-director's income tax and NICs liability is almost 60% lower than an employee's.
The size of the fiscal penalty to insecure work is estimated using data from the UK Family Resources Survey and the Landman Economics tax-benefit model.
The tax-benefit model is used estimate the impact on the public finances of the increase in self-employment and zero-hours contracts as a proportion of the UK labour force between 2006 and 2016. This analysis compares the growth in the proportion of self-employed and ZHC workers against a counterfactual scenario where the total number of people in employment increased by the same amount, but the proportion of self-employed and ZHC workers was unchanged from 2006. This would have meant that 1.25 million workers entered more secure employee jobs rather than self-employment or ZHC jobs.
Rather than just modelling the impact of an increase in self-employment at the average (mean or median) self-employed incomes and ZHC earnings, the methodology used here takes account of the distribution of earnings of the extra self-employed and ZHC workers. Analysis of recent income data for self-employed people and earnings data for ZHC workers shows that most of the increase in the proportion of insecure workers in the workforce has come in the lowest 60% of the weekly earnings distribution, with the fastest growth in insecure work for the lowest- paid workers. Accordingly, the analysis here assumes that the extra self-employed and ZHC workers are mainly low-paid.
The model used here estimates the fiscal impact of increased self-employment and ZHC 'in reverse' – by estimating the extra tax receipts which would accrue to the Exchequer if the increases in self-employment and ZHCs as a proportion of the workforce between 2006 and 2016 had not happened, and instead, self-employment and ZHCs had remained constant as a proportion of the workforce since 2006 and more people had moved into secure employee jobs.