econ essay

What do we know about Australia’s self-employed?

Introduction

In Australia, the self-employed make up a small but significant part of the workforce. In

2013, the self-employment rate was 10.4 per cent (World Bank 2016). This represents

approximately 1.2 million Australians (Australian Bureau of Statistics 2016a). There are two

reasons to study the self-employed. Firstly, many countries view self-employment as a

positive force in the economy, with many European governments using self-employment as

an active labour market policy (European Foundation for the Improvement of Living and

Working Conditions 2011). Secondly, the face of self-employment is likely to be changing in

Australia. Traditionally the self-employed were tradespeople, retail owners and professionals.

However, with companies re-hiring ex-workers as contractors, Australians adopting the

sharing economy as a source of income, and an aging workforce, the demographics of self-

employment are now likely to have changed. This review examines what self-employment

looks like in Australia, how it is changing and whether it is beneficial for the economy. It

concludes there is little available literature on self-employment in the Australian context and

that as such, both academia and governments would benefit from further research in this area.

What does self-employment look like in Australia?

The Australian Bureau of Statistics (ABS) classifies self-employed workers as either:

‘employer’-an owner of an unincorporated firm hiring employees; ‘own account worker’- an

owner of an unincorporated firm who hires no employees; and ‘contributing family worker’.

Of note, owners of incorporated firms are counted as ‘employees’ rather than self-employed

(Australian Bureau of Statistics 2013).

According to the ABS these groups now make up the following proportion of employed

Australians:

 ‘employer’: 2 per cent

 ‘own account worker’: 3 per cent

 ‘contributing family member’: 0.2 per cent

 ‘owner of an unincorporated enterprise’: 7 per cent (Australian Bureau of Statistics

2016b).

Atalay et al. (2014) used data from another source-the Household, Income and Labour

Dynamics in Australia (HILDA)-and estimated that the self-employed are likely to be older

and male. The self-employment rate in older workers (aged more than 55 years) was around

double that of younger workers as was the self-employment rate of males compared to

females (Atalay, Kim, and Whelan 2014, 477). Beyond this we know little else about the self-

employed in Australia because most literature focuses on the United States, Canada and the

European Union. For example we have no indication of Australia’s self-employed work

motivation, average earnings, main industries and education levels. In contrast, data from the

US suggests that the relationship between education and self-employment is U shaped; the

least educated and most educated have a higher propensity to be self-employed

(Blanchflower 2000, 488). The top two industries for self-employment in the US are

‘Professional and business services’ and ‘Construction’ (Goetz, Fleming, and Rupasingha

2012, 317). This suggests the self-employed are a heterogeneous group, which is also likely

to be the case in Australia.

Trends in Australia’s self-employment rate

What we do know is that the self-employment rate in Australia has been decreasing since its

most recent peak of 16.3 per cent in 1993 (Atalay, Kim, and Whelan 2014, Harrison 2015,

World Bank 2016). Authors suggest different causes for this decline. Atalay et al. (2014)

attribute it to a combination of two factors. The first is increased labour force participation,

particularly by older females. This means that the pool of people in the workforce has

increased, driving down the self-employment rate. Increased labour force participation of

older females is caused in turn by increased employer demand for this demographic and an

increase in the age of accessing the pension (Atalay, Kim, and Whelan 2014, 486). The

second factor is decreased entry into self-employment from both unemployment and paid

employment pools (Atalay, Kim, and Whelan 2014, 479-480). Harrison (2015) instead bases

the decline on small business consolidation. The premise behind this is that most

self-employed workers are small business owners. Hence, the decline in small business

ownership in Australia has led to a corresponding decrease in self-employment rates.

This decline in self-employment is not unique to Australia. Blanchflower (2000) notes that

with the exception of the UK, Portugal and New Zealand, decreases have occurred in the

majority of OECD countries including the United States. In contrast, Goetz et al. (2012) note

that the United States has experienced a continuous increase in self-employment since the

1960s and that since 2000, there has been a ‘surge’ in self-employment growth. This suggests

firstly that there are variations in self-employment trends amongst countries and that

secondly, declines in self-employment are not widespread nor are they a hallmark of

developed economies.

Differences in countries’ institutional, labour and tax structures are likely to be behind these

differing self-employment trends. Indeed the literature suggests that there are many elements

influencing or associated with self-employment rates. These include: labour market

conditions, an individual’s access to capital and education, institutional factors such as tax

rates, business conditions, and structural changes (Burke, Fitzroy, and Nolan 2002,

Blanchflower 2000, Harrison 2015, Parker and Robson 2004). However, Australia’s tax

system is unlikely to account for the recent declines in self-employment since taxes have not

changed significantly in recent times nor do they differentiate between employees and the

self-employed (Atalay, Kim, and Whelan 2014, 485).

Unfortunately, there appears to be no research internationally or in Australia on how the

nature of self-employment itself is changing. That is, whether there are changes or transitions

within the underlying groups which constitute the self-employment pool and the reasons

behind these changes.

Self-employment and the economy

It is unclear whether the decline in the self-employment rate has been beneficial or

detrimental to the Australian economy. Goetz et al. (2012) argue there has been little research

on the relationship between self-employment rates and the performance an economy because

anecdotal evidence is often enough to prove the benefits of successful entrepreneurship. More

bluntly Blanchflower (2000) states that ‘probably the greatest interest in entrepreneurship

springs from a belief that small businesses are essential to the growth of a capitalist

economy’.

There is a mixed opinion on whether high levels of self-employment help economies or not.

On the one hand as Congregado et al. (2010) state, boosting self-employment should have

positive effects on unemployment through two means. Firstly by removing an individual

from the unemployment pool and secondly by the eventual creation of additional jobs when

the firm grows. Rupasingha and Goetz (2011) and Goetz et al., (2012) confirm that in US

counties, higher self-employment rates are associated with lower unemployment, and go

further, showing that they also improve per capita income growth (including employee

wages) and reduce poverty (in non-metropolitan counties).

On the other hand Blanchflower (2000) found no relationship between a country’s level of

self-employment and its GDP growth, nor any consistent relationship between

self-employment and unemployment rates. But it is important to consider that Goetz et al.

(2012) found a lag between self-employment increases and subsequent employment growth.

Additionally, a measure such as GDP may be too blunt a measure for determining the local

impacts of self-employment.

At the individual level at least, self-employment may have a significant non-market value;

those who are self-employed have a higher job satisfaction (Blanchflower 2000, 502).

Hamilton (2000) observed that many self-employed remained in self-employment despite

lower earnings than their employee counterparts because of their ‘non-pecuniary benefits’.

Even if international studies were in agreement on the relationship between self-employment

and economic performance, it is not necessarily the case that this relationship would hold in

Australia. This is because each country has different institutional and demographic

differences which are likely to affect the relationship between the self-employed and other

parts of the economy. This justifies the need for an Australian based study, similar to Goetz et

al. (2012) to determine how changes to the self-employment rate affect regional or state

economic indicators.

Conclusion

The self-employed make up a significant proportion of the Australian labour force, but the

scarcity of literature means that we know little about them, a sentiment which is shared by

Atalay et al. (2014). The rate of self-employment in Australia has been declining, and there

have been studies hypothesising why this may be the case. But it is unclear the effects that

this decline has had or will have because there is no consensus, even internationally, about

the role that self-employment plays in the economy.

There is therefore a need for future research into the state of self-employment in Australia.

This research can be categorised into three areas. Firstly, further characterising self-employed

workers, focusing on motivation, average earnings, and industry of work and education

levels. Secondly, investigating the trends in self-employment in Australia with a focus on

transitions amongst the individual subgroups comprising the self-employed and the possible

effects of demographic and structural changes on these transitions. And thirdly, investigating

the effect that the decline in self-employment rates is having on the economy. Combined, the

results of this research will form a strong evidence base on which Australian governments

can develop sound entrepreneurship policy.

References

Atalay, Kadir, Woo‐Yung Kim, and Stephen Whelan. 2014. "The Decline of the Self‐ Employment Rate in Australia." Australian Economic Review 47 (4):472-489.

Australian Bureau of Statistics. 2013. Labour Statistics: Concepts, Sources and Methods. Cat

no. 6102.0.55.001.

Australian Bureau of Statistics. 2016a. Australian Labour Force, Cat no. 6202.0.

Australian Bureau of Statistics. 2016b. Labour Force, Australia, Detailed, Quarterly, Feb

2016. Cat. no. 6291.0.55.003, table 13.

Blanchflower, David G. 2000. "Self-employment in OECD countries." Labour economics 7

(5):471-505.

Burke, Andrew E, Felix R Fitzroy, and Michael A Nolan. 2002. "Self-employment wealth

and job creation: The roles of gender, non-pecuniary motivation and entrepreneurial

ability." Small business economics 19 (3):255-270.

Congregado, Emilio, Antonio A Golpe, and Mónica Carmona. 2010. "Is it a good policy to

promote self-employment for job creation? Evidence from Spain." Journal of Policy

Modeling 32 (6):828-842.

European Foundation for the Improvement of Living and Working Conditions. 2011. Public

measures to support self-employment and job creation on one-person and

microenterprises.

Goetz, Stephan J, David A Fleming, and Anil Rupasingha. 2012. "The economic impacts of

self-employment." Journal of Agricultural and Applied Economics 44 (03):315-321.

Hamilton, Barton H. 2000. "Does entrepreneurship pay? An empirical analysis of the returns

to self‐employment." Journal of Political economy 108 (3):604-631. Harrison, Anthony H. 2015. Declining self-employment: examining evidence and labour

market impacts of business consolidation. Department of Industry Innovation Science

and Research.

Parker, Simon C, and Martin T Robson. 2004. "Explaining international variations in self-

employment: evidence from a panel of OECD countries." Southern Economic

Journal:287-301.

Rupasingha, Anil, and Stephan J Goetz. 2013. "Self‐employment and local economic performance: Evidence from US counties." Papers in Regional Science 92 (1):141-

161.

World Bank. 2016. Self-employed as a percentage of total employed.