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Puzzling Picture on ?Jobs Foxes Experts

Norma Cohen, Financial Times
Thursday, 16 Aug 2012 | 1:53 AM ET

Soli Zardosht had a flourishing career as a menswear designer at Dewhirst, a manufacturer, creating fashions for well-known brands from Oswald Boateng to Pringle of Scotland until the depth of the recession in 2009 when she was made redundant.

Paul Bradbury | The Image Bank | Getty Images

Afterwards, Ms Zardosht, now 31, launched herself into an entirely new career as a chef, joining the ranks of the 4.2 million people in Britain who describe themselves as self-employed.

New data from the Office for National Statistics show that 218,000 have become self-employed over the past year, with the record 4.2m working that way accounting for nearly 14 per cent of the total labor pool.

Ms Zardosht is now a chef-in-residence at Cafe Oto in Hackney three days a week for which she gets a percentage of the take and has a weekend food stall at nearby Broadway Market as well. “I am working hard, but I am working hard for myself,” she said, adding that she is much happier than when she worked for Dewhirst.

But Ms Zardosht’s activities may be a key to a phenomenon which is deeply puzzling to economists and which senior officials at the Bank of England (BoE) concede has them stumped. How is it that the numbers of employed people are rising and unemployment claims are falling, while the UK economy is contracting? As a result, worker productivity, output per hour worked, is falling. In the first quarter of this year, worker productivity declined by 0.7 percent and overall remains well below its pre-recession trend.

The decline in productivity is particularly acute in services, an activity that would include chef’s work. The question is whether the value of Ms Zardosht’s output as a chef is producing as much value per hour worked as it did when she designed menswear.

The BoE appears to have come to accept that the decline in productivity is enduring. It has downgraded its medium-term forecast for gross domestic product, taking the view that the economy’s potential growth path is diminished. In its latest inflation report, it discussed the decline in productivity, including a detailed section on self-employment. It did not draw conclusions about whether the growing army of these workers were indeed producing goods and services worth less than those they produced as employees of larger companies.

But the anecdotal evidence abounds. “We have all heard the stories about the high-priced corporate lawyer who got laid off and now is in business for himself,” said Michael Saunders, an economist at Citi. Lawyers who once advised on commercial property deals or structured finance securities are likely to have much lower billings per hour worked.

But there is evidence that in some sectors, the number of those leaving employment to set up as a sole trader is rising rapidly and likely to be earning less than they did as an employee. Between the second quarter of 2011 and the same period in 2012, the number of those in administrative and secretarial professions setting up as sole traders rose by 23 per cent, while the number of self-employed managers and senior officials rose by 10 per cent.

Other anecdotal evidence about declining services sector productivity can be found in the BoE agents’ reports. One, last November, noted that professionals were spending more time trying to drum up new business and rather less seeing to clients.

One theory is that UK GDP, which has fallen in each of the past three quarters, may be mis-measured. Alan Clarke, economist at Scotia Bank, calculates that GDP has been distorted by one-off events including additional holidays, bad weather and the disruption of a North Sea oil platform. Growth for the second quarter was likely to have been around 0.25 per cent, not -0.7 per cent. Why else would firms be hiring like it is going out of fashion?,” he said.

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