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An article in The Times looks at the impact of being self-employed on the productivity puzzle.

It is a conundrum that has taunted economists for years, but has yet to be met with a satisfactory answer: just why has Britain's productivity growth ground to a halt?

For decades - indeed, centuries - there was a clear trend: certainly there may have been a few setbacks along the way, but productivity, as measured by output per hour worked, edged gently upwards.

Between the spring of 1994 and the end of 2007 - just as the financial crisis was starting to hit - the productivity of the UK workforce rose by nearly 30%. That, history taught us, was the way things naturally progressed: humankind was constantly finding cleverer, cheaper ways of doing things, and so productivity climbed.

But during this decade it has stagnated. Indeed, two successive quarters of decline earlier this year dragged output per hour down to a level below that seen at the end of 2007. This is the productivity puzzle.

Recent history suggests an explanation. Look at what has happened to employment since 2009, when the recovery from the financial crisis began to take hold. Then look at the post-recession recovery of 1993-2000. Compare and contrast. The exercise yields an important insight.

At the very beginning of each recovery, the picture was similar: in both cases, productivity began to improve. But then it took markedly different paths.

From 1993, productivity headed steadily upwards. Through the years from 2010, it has stagnated. Why?

Here is a possible answer: From 1993 to 2000, the number of people working for themselves fell by 300,000. But between 2010 and 2017, self-employment numbers have increased by 1m, accounting for nearly one third of all jobs created.

There is a clear association between a rise in self-employment and productivity becoming becalmed. Reinforcing this pattern, whenever self-employment has picked up most sharply — for example, between 2011 and 2013 and in 2015 — productivity has taken a big hit.

Contrary to popular belief, the ranks of the self-employed are not populated by innovative entrepreneurs who might be expected to boost productivity and create jobs for others.

The Office for National Statistics itself has dismissed the thesis of enhanced innovation, saying: “While there has been an increase in the number of people who are self-employed, there has been a reduction in the number of people who work for the self-employed.”

In truth, the new self-employed army consists of former employees — in sectors such as media and technology, for example — who are now freelancing.

This suggests an explanation for the productivity puzzle.

Job creation that is skewed to self-employment depresses productivity growth. Why? Because this burgeoning group of people have to carry out tasks for which they have no particular skill. A newly freelance journalist has to spend time managing IT problems and accounts rather than actually doing the job for which they are best equipped.

This runs alongside a second shift in the workforce. As the Bank of England pointed out this month: “Some of the softness in recent pay out-turns has related to the composition of employment, with the number of low-paid jobs growing disproportionately.”

A study by the Federal Reserve Bank of San Francisco has identified exactly the same trend in the US. Put simply, growth in average wages is modest because low-wage jobs are being created while the number of highly paid ones is shrinking. (In part, this is because automation and artificial intelligence are replacing middle and upper-income jobs.)

Meanwhile, the number of lower-paid positions, such as waiting at tables in restaurants or caring for the elderly — jobs that are far less susceptible to, or threatened by, automation — is going up.

Indeed, the San Francisco study found that full-time employees who hold on to their jobs are doing pretty well: their wages are growing almost as fast as they were in 2007, the last economic peak.

However, the impact of these increases on average earnings is more than outweighed by the departure of workers from full-time, high-wage jobs, while people joining or rejoining the labour market are doing so at low pay rates.

The San Francisco Fed suggests that this “composition effect” is particularly pronounced at the moment because a large number of baby-boomers are reaching retirement.

Furthermore, with so many of the baby-boomer generation yet to retire, “the so-called silver tsunami will continue to be a drag on aggregate wage growth for some time”.

So what can we conclude? Don’t expect average wages to shoot up any time soon. And, as long as self-employment grows, expect productivity growth to remain modest at best. Less of a puzzle, more of an unwelcome reality.

Dhaval Joshi is chief European investment strategist at BCA Research