Declining Self-Employment Rates Are A Good Sign For Workers

Against the backdrop of the relative tightness of the post-pandemic labour market, some commentators raised concerns about the decline of self-employment.

A report by RBC from last fall warned that “entrepreneurship is becoming less enticing for Canadians.” Media coverage of the report pinned part of the blame on “younger Canadians” not wanting to “be their own bosses.”

However, from a labour perspective, a falling self-employment rate is a positive development. Given the many economic insecurities associated with ‘being your own boss,’ declining self-employment should be celebrated, not mourned.

There are several reasons why falling self-employment is a good sign for workers. Perhaps the first of them is the strong association between labour market insecurity and higher rates of self-employment. In short, declining self-employment is generally a sign that workers’ employment prospects are improving. By contrast, the reverse is also true. A look at recent history bears this out.

Canada’s shrinking self-employment rate predates the post-pandemic economy by roughly two decades. After rising from the early 1980s through to the mid-1990s, self-employment as a share of total employment fell slowly thereafter. Peaking at just more than 17 per cent in 1998, it hovered below 15 per cent in the years preceding the pandemic, with a minor uptick during the 2007 to 2009 recession.

As a recent report by Statistics Canada notes, the rise in self-employment during the '80s and '90s was associated with economic recession, high unemployment, and a generally unfavourable labour market.

Researchers have linked this historical growth of self-employment to the broader rise in precarious forms of work and the declining fortunes of workers overall. Growth in self-employment during this period was part of the trend toward labour market deregulation, when union density was falling, part-time work was growing, real wages were stagnating and employers and governments were searching for ways to lower labour costs and force workers to absorb the impacts of economic restructuring. Along with involuntary part-time work, self-employment emerged as a way that workers managed the social consequences of neoliberalism.

Thankfully, as the labour market improved somewhat throughout the 2000s, the rate of self-employment leveled down. Moreover, this decline was largely concentrated among the so-called “marginal self-employed,” (i.e., the solo, unincorporated self-employed). The COVID-19 pandemic then accelerated this trend away from self-employment. As the economy rebounded and employment levels improved, self-employment fell further. Record-high job vacancies and high nominal wage growth following the lockdowns likely held self-employment down. As StatCan reports, in 2023, a low of 13.2 per cent of workers were self-employed.

Yet among those who remained self-employed, indications of precariousness continued to exist. For example, in the reference period of a recent StatCan study (the fourth quarter of 2023), seven in 10 self-employed workers operated “small businesses” with no employees, while nearly half of these businesses were unincorporated. Without employees, the solo self-employed are limited in their ability to generate revenue and thus earn income. By remaining unincorporated, these solo “small businesses” miss out on the tax advantages enjoyed by incorporated firms. In general, small self-employed businesses have low levels of investment and thus low labour productivity. This is not a recipe for livable earnings.

Although the majority of the self-employed are men (62.9 per cent), self-employment among women has grown along with their labour force participation. However, self-employed women tend to experience more insecurity of earnings and make up a larger share of the solo, unincorporated self-employed than their male counterparts. Unless one is a highly credentialed freelancer, earnings from “own account” or solo self-employment tend to be low and uncertain, regardless of gender.

The pandemic only made this economic insecurity worse, for both women and men. Statistics Canada has long reported low and highly unequal earnings among the self-employed. As far back as 2005, for example, nearly 80 per cent of the self-employed earned less than $20,000 annually. StatCan has also noted lower median household incomes among the self-employed for some time.

Low and uncertain earnings create additional problems as well. Most self-employed workers are without a pension or benefit package and are therefore left to fend for themselves when it comes to saving for retirement or dealing with uncovered medical expenses. While some may opt in to Employment Insurance, many don’t or simply can’t afford to. Moreover, the self-employed must pay both the employee and employer portions of Canada/Quebec Pension Plan contributions, which for those earning low pay can be a significant financial burden.

The most recent self-employment figures also register the growing trend of “gig work.” Spurred on by the rise of app-based platform labour, 26.6 per cent of the self-employed were gig workers in their main job in the fourth quarter of 2023, according to StatCan. Among the self-employed, women were more likely than men to be gig workers in their main job, while racialized and new immigrant self-employed workers were disproportionately working in the gig economy. The primary reason given by immigrant workers for engaging in gig work was an inability to find work as an employee.

The growth and spread of gig work reveals a further persistent problem of self-employment: misclassification. The primary battle with apps such as Uber has been over workers’ employment status. By classifying their workers as self-employed independent contractors, app-based companies avoid labour regulations, such as minimum wage requirements and employment standards protections, as well as workers’ compensation and social insurance contributions.

Labour advocates have generally understood the app companies’ employment practices as a form of employee misclassification. Yet misclassification has long been an issue for the self-employed, and a deliberate strategy on the part of employers to avoid statutory obligations to workers. In many industries — freight trucking, for example — companies routinely misclassify workers as “self-employed” to download the costs of doing business onto workers. Across various industries, self-employed workers are often embedded in labour supply chains that render them dependent on one or two firms that purchase their “services.” Their self-employment is often little more than a ruthless business strategy.

Self-employment is in many senses a barometer for the overall health of the labour market. Although some workers undoubtedly choose self-employment for the autonomy and flexibility it offers — StatCan’s recent study finds that more than 38 per cent of surveyed workers indicated this was their primary reason for being self-employed — many others are effectively forced into self-employment or gig work due to a lack of better options. This is evidenced by the fact that self-employment tends to rise during economic downturns and fall during economic expansions, especially when unemployment is low and wages are rising.

Labour advocates should be clear about the economic benefits of falling self-employment rates. Indeed, business organizations have been in the media using the drop in self-employment as a chance to call for more support for businesses, and warning of the dire economic consequences of declining self-employment.

Such messaging needs to be combatted. Rather than encouraging self-employment on the shaky assumption that this will generate ‘entrepreneurship’ and innovation, we should be designing policies to promote full employment and empower workers as employees.

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