Hamish McRae: Britain should welcome this silent revolution

Economic View: People start in jobs to learn the trade, then see opportunities or get fed up with the confines of being employed

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The Independent Online

The puzzle continues – but in an encouraging way. The puzzle is why we have record employment in an economy that is supposedly in recession? But at least we have decent job growth, notwithstanding quite proper concerns about the quality of the jobs being created, and that should be a source of relief, if not celebration.

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We will not know the full answer to the puzzle for several years, but it must be some combination of undercounting GDP and changes in the labour market which have meant output per worker has declined. The Office for National Statistics had a seminar on the productivity puzzle earlier this week and argues it is implausible that undercounting of GDP could be so large as to account for most of the mismatch. It thinks the growth of lower-productivity jobs (part-timers, self-employment, temporary jobs and so on) and the loss of high-productivity ones is more important.

We will just have to wait and see. In the very latest set of labour market data there seems to be a slight slackening in the rate of job creation, which may signal worries ahead. On the other hand, British consumers seem to be recovering their confidence. They will be helped by the decline in inflation, though the consumer price index is still outrunning the rise in wages. Still, we managed to increase car purchases (or at least car registrations) by 8.2 per cent in September compared with the same month last year, and that does not look like austerity.

Actually, European car sales are fascinating because they show, in magnified form, the divergent patterns of consumptions across Europe. During the first nine months of the year, overall registrations in the EU were down 10.8 per cent. There was only one market where they were up and that was the UK. Even Germany was down and as you can see from the bottom graph, Italy and Spain are a disaster.

When figures are uncertain or conflict with each other, I always like to look at hard numbers. That is why car sales are helpful because they tell you what consumers have done, not what they think or how they say they feel. The next set of hard numbers to watch for will be tax receipts, particularly from VAT, which cover half of consumption, and from National Insurance contributions, which tell us about the numbers of people in work. You don't pay VAT unless you are buying something and you don't pay NICs if you haven't a job. So if receipts go on rising faster than inflation the economy must be growing and if they don't, it is not.

What I think is fairly clear from the labour market figures is that we are in the middle of a massive structural change in the way we are organising our work. As previously noted, there is the shift to part-time employment, some of it voluntary, some not. There is continuing growth of people working beyond normal retirement age. There is the rise of self-employment, with the possibility that in a few years' time there will be more people who are self-employed than work for the state. But one of the most remarkable phenomena of all has been the growth of small businesses.

By coincidence, yesterday saw the publication of the annual survey of British business done by the Department for Business Innovation and Skills. There are now 4.8 million private-sector businesses in the UK, a record number, with somewhere between 200,000 and 250,000 new ones created in the past year. Of these, three-quarters are businesses with no employees: they are sole traders, partnerships where the partners do the work, or companies where the directors do the work. That is the largest growth area, as you can see from the top chart, which shows business growth in the form of an index. Larger businesses – those with up to 49 employees and those with 50-249 employees – have risen over the past decade but don't show anything like this rate of growth. And large businesses, classified as those with more than 250 employees, have declined in number, though that decline now seems to have been halted.

What does all this say? Several thoughts:

First, these are tough times and many people who lose their jobs seem to have set themselves up as businesses. Anecdotally that is what has been happening and it would square with a rise in micro-businesses that has continued right through the recession;

Second, there has also been a rise in businesses that are not registered for VAT or NICs over the past few years. That too would fit with the idea a lot of these businesses are very small, founded by people who want to go on working and have been made redundant. But the total number of registered businesses rose by 80,000 last year and since the floor for VAT registration is a turnover of £75,000, that suggests a decent proportion of these new businesses are serious ones;

Third, there are sharp, regional differences. The number of businesses relative to the population is highest in London and the south-east and lowest in the north-east and Scotland;

Finally, small businesses are massively important as employers. Companies with 49 employees or fewer account for 47 per cent of private-sector jobs.

My own feeling is that there is a silent revolution taking place, of which the rise in self-employment is the visible sign, but which is much deeper than people who have lost a job deciding to set up on their own. It is that a lot more people now regard it as normal to work for themselves for at least part of their careers. People start in jobs to learn the trade, then see opportunities or get fed up with the confines of being employed, and have the self-confidence to set out on their own.

A bit of this may be tax-driven, for there are some advantages of being self-employed. But there are also disadvantages and what seems to be interesting is that for many people the balance of advantage may have shifted. Also, there may have been some societal shift in that being an entrepreneur has become a more cherished social choice. But from a purely economic point of view one thing is clear. Read with the employment numbers, these figures show a revolution is sweeping across our whole economy and – surely – a welcome one.