Budget blogs: The fiscal cost of insecure work

14 Feb 2017, by Kate Bell in Economics

Yesterday’s Budget blog focused on challenges facing the Chancellor as he prepares for the last Spring Budget. New TUC research out today shows why tackling the rise of insecure work should be high on the Chancellor’s agenda, revealing the £4bn a year cost of the rise in low-paid self employment and zero hours contracts.

The report, by Howard Reed at Landman Economics, uses a model of the tax and benefit system to look at the impact on tax, national insurance and in-work benefits of the increasing proportion of the workforce now in insecure jobs.

It shows how the growth of low-paid self-employment and zero-hours contracts has led to a fall in government revenues because:

Low-paid self-employed workers and those on zero-hours contracts earn significantly less than regular employees and therefore pay less tax and national insurance;

This also makes them more likely to need to rely on in-work benefits such as tax credits and housing benefit; and

Even when the self-employed do earn as much as regular employees, the structure of self-employment means they pay less tax.

The report models the earnings penalties faced by those in self-employment and on zero hours contracts. As previous work by the Resolution Foundation and others has shown, even when controlling for the characteristics of workers – for example their education and occupation – workers in these more insecure forms of work earn significantly less. This is true across almost the whole income distribution – other than for the very highest paid self-employed – with the earnings penalties starkest for those in the lowest paid jobs (the full methodology is set out in a technical appendix to the report here).

Regression adjusted earnings penalty across the gross earnings distribution for self-employed workers and ZHC employees compared (Figure 2.3 of the full report).

But as the IFS highlighted recently, the self-employed earn less, but pay less tax even on a like for like basis. Taxation of self-employed earnings differs depending on whether the person registers themselves as a ‘sole trader’, paying national insurance, or chooses to incorporate themselves as a business, and pay tax on their dividends. The report sets out the impact on the public finances assuming either that all of the self employed are sole traders (with a lower potential impact on the public finances), or all are incorporated (the highest potential impact). We report the lower figure here but the reality is likely to be somewhere in-between.

To estimate the impact of the shift to insecure work over the last decade on the public finances, the report compares the current jobs market to a situation in which the labour market had grown, but the proportion of those in self-employment or on a zero hours contract had remained the same.

The results are striking. Looking at the impact of the shift to self-employment across the whole income distribution, alongside the growth of zero hours contracts, suggests that the exchequer is hit to the tune of over £5 bn, compared to a situation in which the balance between secure and insecure jobs in the economy had been static.

Fiscal impact of increased self-employment and ZHC working: lower bound estimate assuming the increase in self-employed workers between 2006 and 2016 is all sole traders paying Class 4 NICs (£bn/year) (Table 5.1 of the full report)

Source Self-employed ZHC employees total Income tax -1.09 -0.62 -1.71 NICs -1.58 -0.81 -2.39 Tax credits and benefits -0.77 -0.44 -1.21 Total -3.44 -1.87 -5.31

The report shows that the majority of the impact comes from the lower earnings faced by these workers, rather than the differential tax treatment of the self-employed. In this estimate, just under eight per cent of the impact on the exchequer from increased self employment comes from the impact of the different tax treatment, with the remainder due to lower incomes.

Looking only at the increase in low-paid self employment – where the TUC has focused our concerns about insecure work – the fiscal impact is still large — £4bn, with £2.1bn of this coming from the increase in self-employment in the bottom two quintiles of the income distribution, and £1.9bn coming from the rise in zero hours contracts.

So it’s clear that the rise in insecurity at work is a problem for the Chancellor and those facing low pay and a loss of rights. What can he do to address it?

We’re pleased to see Matthew Taylor engaging with the issues as he gets stuck into his review of modern employment; providing a written statement of terms and conditions to everyone at work for example is something the TUC has long argued for.

The Chancellor doesn’t need to wait for the review to conclude to take action. Some of the most high-profile cases of insecurity – including at Uber and CitySprint, have come to prominence because workers have been supported to take their case to an employment tribunal – exposing sham self-employment arrangements that were denying them rights and pay. However the number of people taking Employment Tribunal cases has fallen by thousands a month since the coalition government imposed fees of up to £1,200 a case. Any government serious about tackling insecurity would reverse that decision swiftly.

We saw some welcome (if minimal) additional resources for national minimum wage enforcement at the Autumn Statement. Government should now also beef up the power of the Gangmasters and Labour and Abuse Authority to stamp out the worst abuses of labour rights; at present it is being asked to regulate sectors that are worth £100 billion on a budget of just 0.004 per cent of that.

Government might also want to think through the impact of its policies on those facing insecurity now. While we want to see people in more secure jobs, and earning more, cutting in-work benefits isn’t the way to achieve that. The stark cuts in Universal Credit coming down the line are set to hit the incomes of the low paid in insecure jobs hard. The changes include taking £800m out of the pockets of the self-employed by 2020/21 through the introduction of a ‘minimum income floor’. Without a swift change of course, the Chancellor risks not tackling insecurity but increasing it.