Some forms of self-employment perpetuates low income, writes Nida Broughton

Self-employment has historically be seen as a way out of poverty for disadvantaged ethnic groups. The entrepreneurial immigrant setting up a shop or a new business, working hard to overcome adversity, is perhaps the archetypal vision that many have in mind. And indeed, self-employment rates have, in the past, been very high among some ethnic minority groups – Chinese, Indian, Pakistani and Bangladeshi men in particular.

The propensity to become self-employed among these groups was so widely seen as an example of success that the 1981 Scarman report, written in response to the Brixton Riots, recommended encouraging more self-employment among other groups where going into self-employment was much less common. For Black Caribbean and Black African groups, this was seen as as a way of reducing unemployment.

Similar advice lingers on today. The Government has recently announced a review into how encouraging business start-ups can help disadvantaged communities. So is more self-employment part of the answer to helping individuals and families escape poverty? The story of ethnic minority self-employment is instructive, and suggests that there are two important reasons why we should be cautious.

Firstly, high rates of self-employment can be a direct consequence of difficulty in accessing good opportunities as employees. If that is the case, then encouraging more self-employment effectively ignores the underlying causes of disadvantage. Yet, where these causes are factors such as poor local economic growth, or poor skill levels, making a success of self-employment is likely to be challenging.

It is striking that at the start of the 1990s, almost 24% of men of Indian ethnic origin in work in the UK were self-employed – more than 40% higher than the self-employment rate among white men. Twenty years later, that gap has disappeared. The same is true – to a lesser extent – for Indian women, although female self-employment is much lower among all parts of the population.

The decline in self-employment is partly due to the fall in the proportion of the Indian population who were born outside of the UK; in general, self-employment tends to be higher among first-generation migrants. But it is unlikely to be a coincidence that, during the same period, those of Indian ethnic origin have seen a remarkable improvement in their educational outcomes and job prospects. Indian UK-born workers now earn either the same or more than their white counterparts, and are more likely to be managers, senior officials and professionals.

Essentially, first generation migrants from India appear to have turned to self-employment as a response to poorer opportunities to work as employees. Migrants can often find it more difficult to make the most of their skills and qualifications after moving to a different country due to language barriers, fewer social networks and lack of recognition of foreign qualifications. However, as their children gained greater access to the best jobs, self-employment has become much less attractive an option.

One could argue that this is a success story; first generation migrants went into self-employment and in doing so were able to bring in an income and give their children advantages that they did not have themselves. Perhaps tackling the reasons why first generation migrants were locked out of the labour market in the first place would be more difficult that relying on self-employment as a way out of disadvantage.

But there is a second reason why we should be careful about promoting self-employment for this purpose. And that is that not all ethnic minority groups are experiencing the same pattern of improvement as the Indian group. For some, self-employment is perpetuating down the generations, much of it low paid and with poor future prospects.

The experience of the Pakistani group, in particular, is concerning. Over a quarter of Pakistani men are in self-employment, the highest of all ethnic minority groups. This cannot be put down to migration patterns alone: a higher proportion of the Pakistani group is UK born compared to the Indian group.

Yet, self-employment remains high, and in fact has risen since the early 2000s. And much of this self-employment is relatively low paid. Around 53% of self-employed Pakistanis are in the transport sector, mostly taxi-driving. It is a competitive market and there are few opportunities for business growth. Meanwhile, those who do look for jobs as employees continue to experience severe disadvantages.

Among the Pakistani group, those working for an employer are paid on average almost £2 an hour less than the white majority group. Even for UK-born Pakistanis, the gap is around £1.40. Unlike their Indian counterparts, Pakistani families have been unable to use self-employment as a way out of poverty for themselves or for their children.

Self-employment is no easy answer to unemployment and poverty. Instead, we need to focus on the underlying reasons why some groups are shut out of the labour market in the first place – whether it is related to education, networks, local economic performance or discrimination.

For those already in self-employment, we should worry more about those that are stuck in low pay for long periods of time. Whilst it is tempting to reach for policies around business growth, in many cases, support needs to be much wider than this, tackling barriers to getting higher paid work in general, and widening job opportunities.

The full report, Self-employment and ethnicity: an escape from poverty?, was written by Nida Broughton, Social Market Foundation and was published by the Joseph Rowntree Foundation.

Nida leads the SMF’s research on skills policy, entrepreneurship and analysis of public spending. She also undertakes research on a range of public policy areas including healthcare, education, housing and consumer markets. Nida previously worked at the House of Commons, where she advised MPs and committees on a broad range of economic issues, and in particular, on financial services. Nida also has in-depth expertise in consumer regulation, competition policy and behavioural economics, gained whilst working at Ofcom, the UK regulator and competition authority for communications markets. She has an MA (Cantab) in Economics from Cambridge University and an MSc in Economics from Birkbeck College, University of London.