Part 9 of 10: Why ‘more entrepreneurship’ isn’t the solution to technological unemployment

This is the ninth in a series of ten posts on the threat to jobs and growth from technology and online distribution, and what we might do about it. 

  • The first part summarises the argument
  • The second introduces the challenge.
  • The third looks at the threat to jobs from automation.
  • The fourth looks at the threat to jobs from online competition.
  • The fifth looks at what economic problems this might cause.
  • The sixth looks at the social and moral problems it might cause.
  • The seventh looks at some of the arguments against a policy response: are we really sure this is a problem? Doesnt technology always create as many jobs as it destroys? Surely there is nothing we can do?
  • The eighth explains why more education and training isn’t the solution to technological un and underemployment.
  • The ninth explains why more self-employment and entrepreneurship isn’t an adequate solution either.
  • The tenth looks at other solutions, and proposes a new one.

I think my dad is worried about how worried I am about the future of work.

The other day he emailed me an article about the rise of self-employment in the EU, with the message: you could stop worrying about the future of work, as so many people are finding their own solutions!

And he is well qualified to say so; he started a small business in 1987 and has run it ever since.

Certainly, anyone who has created their own job or dreams of doing so probably cringes at the idea that the total number of jobs can fall. After all, if you have defined your working identity by making a job not taking a job, cant everyone? Isnt the solution to fewer aggregate jobs more self-employment, entrepreneurship, and enterprise?

The argument acquires a moral flavour if you add words like self-relianceand rugged individualism.’ If robots, technology, or online competition mean fewer jobs, wont people just have to pull up their socks and take some personal responsibility?

The argument also has a strong cultural aspect. We want to believe this. If an American ‘single mom’ working low-paid jobs with three kids can make it big with a mop head you can wring out without getting your hands wet, cant anyone?

I would never discourage anyone from trying.

But that doesnt mean the economy can automatically expect to rely on self-starters to keep the jobs numbers and aggregate demand stable, for three reasons.

1. Most self-employed people dont make much money

In 2013-14 in the UK*, the typical self-employed person made roughly half the median wage of employees. (£210 per week (p.21) vs £385 per week).

And 2013-14 wasnt a one off. Since the turn of the century, the typical self-employed person has earned between two thirds and half of the median employee, as this graph shows.

The dotted lines – the medians – are the relevant ones here because the full lines – the means – are skewed by a few high earning self-employed contractors.

The red dotted line is median self-employed earnings, the green is employee earnings.


Source: The Resolution Foundation: ‘All Accounted For: the case for an ‘all worker’ earnings measure’

2. If jobs move from big companies to small ones, there would still be fewer middle jobs

Okay, you might say, so self-employed people don’t tend to make as much money as employees. But what about new companies which grow and employ new people? If middle jobs carry on disappearing, couldn’t new companies replace them?

I hope so. But it’s a risky bet. The conventional wisdom is that growth is driven by improvements in productivity, improvements in output per hour of work. Traditionally, bigger companies have been more productive than smaller ones; they have economies of scale and it’s easier for them to afford new technologies.

You can already get a sense of that when you look at the businesses in the UK today.

In the UK, most businesses are small, but the businesses with the most turnover are big. 99.9% of businesses employ under 250 people, but 53% of all the turnover in the country was made by the remaining 0.1% – the big boys.

Unfortunately, all other things being equal, that means that an economy-wide shift from employment in big companies to employment in small ones means an economy-wide shift from companies which make a lot of money to companies which don’t make nearly as much, from more productive big companies to less productive small ones.

That would make it harder for an economy of small companies to pay as much as an economy of big companies, putting downward pressure on pay, demand, and growth.

3. Self-starters would have to replace a lot of jobs

The Bank of England estimates that automation could threaten 15 million UK jobs in the next decade or two. If that turns out to be right, would self-starters be able to replace those jobs?

Maybe, but it would be hard.

Here’s a very rough and ready way of thinking about it. Britain, with its relatively entrepreneurial culture and ease of doing business, has 12.4 million people working in small businesses (firms with fewer than 50 employees).

Assume for the moment that all of the jobs at SMEs – companies with 250 or fewer employees – were safe. In other words, that the 15 million jobs lost to automation came from big companies with deep enough pockets to take on the labour-displacing technology first. Let’s also assume that the workforce stays the same size: perhaps net migration cancels out the effects of an ageing population.

In that scenario, the only way the employment rate could stay steady would be if self-starters or small companies created 15 million new jobs. That’s more than the 12.4 million they have created to date. That’s a big ask.

In reality, plenty of other things would complicate the picture. Perhaps the Bank’s estimate for jobs lost to automation could prove optimistic or pessimistic. Perhaps automation eats into the numbers employed by small companies as much as big companies. But in that case, self-starters would have to create even more jobs to keep the employment rate steady.

But I think we can be sure about two things.

Historically, most of the countries which have enabled the broad mass of people to get richer together are those which have produced a mass of middle-income jobs, like Germany or France in the decades after the war. One of the reasons poor countries are poor is because they tend to have a lot of self-employed people. I think about the people selling fruit, snacks, and trinkets in the streets. These jobs are better than nothing, but they’re not a strategy to bring a broad mass of people towards prosperity.

Secondly, if millions of people do move from being employees to self-starters, it would represent millions of self-starters who would prefer a job – a seismic cultural shift.

It’s not hard to see why most people who come out of education want a job: they want the certainty of regular pay, knowing when they can expect to pay off their student loan, build a credit history, get a mortgage, learn skills, not to mention security, status, structure, and the smaller things you take for granted when you’re an employee, like knowing there will be a Christmas party whether or not you organise it.

In short, even though an increase in self-employment and entrepreneurship would be good news, we shouldn’t expect it to maintain the employment rate, purchasing power, or demand.

But if more education and training or self-employment wont solve the problem of lower growth due to a big loss of middle jobs – what might? In part 10 Ill look at that.

*All these figures are British. But compared to most other European countries, Britain has a relatively good culture and environment for self-employment, so the argument is likely to hold for most countries.