March 30, 2023

Kardama

Moving Forward

Will US freelancing surge make its way to the UK?

SPECIAL REPORT

In just a matter of years, the US labour market could reach a 50-50 split between salaried and freelance workers. Could we expect that trend to make its way over to the UK? Or do too many tax and work status policies remain counterproductive to that type of alternative earning power for the British economy?

Source: Upwork’s 2022 Freelance Forward survey

With the current economic uncertainty, along with the rise of movements such as “The Great Resignation” and “Quiet Quitting,” many professionals are undergoing a once-in-a-generation reassessment of what it means to have a fulfilling career.

Like the UK, large swaths of the US workforce are questioning the traditional, entrenched ways of working, and are instead seeking out alternate career pathways. The result: in 2022, a staggering 39% of the U.S. workforce, or 60 million Americans, performed freelance work in the past year, an increase from the year prior. That’s according to Upwork’s 2022 Freelance Forward survey, a representative study of 3,000 professionals, which the Freelance Informer has analysed in more detail.

The study revealed that over half of US-based freelancers provide knowledge services: 51% of all freelancers, or nearly 31 million professionals, provided knowledge services such as computer programming, marketing, IT, and business consulting in 2022. Freelancing continues to grow among the most educated, found the study, with 26% of all U.S. freelancers holding a postgraduate degree, up from 20% in 2021.

This is a wake-up call for hiring companies because knowledge is power. And when those with knowledge feel they are being exploited by unfair working and tax policies and higher costs of living, they go onto pastures new. Hence, the onset of the digital nomad revolution.

At a time of economic and labour market uncertainty, Upwork’s study found that American freelancers contributed approximately $1.35 trillion in annual earnings to the US economy, $50 billion more than in 2021. This growth was driven in large part by professionals seeking alternatives to the traditional model of a full-time, 9-to-5 job. The data shows that increasingly, professionals are exploring the benefits of freelancing, whether for extra income, autonomy or as a way to find more meaningful work.

How do UK freelancer numbers compare to the US?

As of October 2022, there were around 4.2 million self-employed workers in the United Kingdom. During this provided time period, self-employment in the UK has grown steadily, from a low of just 3.2 million in December 2000, to a peak of over five million at the start of 2020. In the wake of the Coronavirus (COVID-19) pandemic, however, self-employment has fallen to levels not seen since the middle of 2015 (Statista).

For those monitoring the UK contractor, IR35 and Off-Payroll rules had a big role to play in the dive in UK’s self-employment numbers.

Implemented in April 2021, IR35 has shifted the responsibility for determining a self-employed worker’s employment status from individual freelancers to their clients.

The reform has been widely criticised, with a number of organisations, freelancers, opposition parties and even some Conservative MPs calling out the reforms as “flawed”. It has also caused mass uncertainty in the sector, with IPSE research finding that more than a third of freelancers (35%) have closed their businesses since the changes. That in itself is devastating to families and the economy.

UK freelancers and those across Europe should track US freelancer trends as they often influence the European freelancer economy and hiring companies who are increasingly doing cross-border work.

Key findings of the Upwork study include:

  • Freelancing remains a significant part of the US labour market and economy: Freelancers contributed $1.35 trillion to the US economy in annual earnings in 2022, up $50 billion from 2021.
  • Freelancing hits an all-time high: The share of professionals freelancing increased to 60 million Americans, up three percentage points from 2021 to 39%.¹
  • Perceptions of freelancing continue to shift: Nearly three-quarters of freelancers (73%) say that perceptions of freelancing as a career are becoming more positive, up from 68% in 2021.²
  • Gen Z and Millennials are the most likely to explore freelancing: In 2022, 43% of all Gen Z professionals and 46% of all Millennial professionals performed freelance work.
  • Over half of freelancers provide knowledge services: 51% of all freelancers, or nearly 31 million professionals, provided knowledge services such as computer programming, marketing, IT, and business consulting in 2022.
  • Diversified workers become more common: 17% of US workers are now diversified, meaning they seek multiple sources of income from a mix of traditional employment and freelance work, up three percentage points from 2021.
  • Freelancing continues to grow among the most educated: 26% of all US freelancers hold a postgraduate degree, up from 20% in 2021.

How much do freelancers contribute to the economy?

Freelancing as a whole continued to grow in 2022. Compared to last year, an additional 3% of the US workforce did some form of freelance work this year, for a total of approximately 60 million Americans or 39% of the workforce. This increase also contributed to a more significant economic impact. In 2022, freelancers contributed $1.35 trillion to the US economy in annual earnings, up $50 billion from 2021.

How does the UK freelancer economic contribution compare to that of the US?

Freelancers contribute approximately £20 billion to the British economy each year. This is the same amount that the Aerospace industry contributes. Yet these statistics are largely based on the gig economy which often doesn’t even include the highly skilled end of the freelancer spectrum.

Reports into gig economy statistics estimate that £3.2 billion (16%) of this British economic contribution is made of earnings from Uber drivers while one study by Capital Economics believes Deliveroo will contribute £1.5 billion to the UK economy.

Some estimates push this economic contribution further, stating the spiralling growth of the gig economy in the UK could explode to a £63.25 billion contribution to the UK economy by 2026, using CAGR.

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What’s driving this growth?

Over the past two years “quitting” has dominated the headlines. Some professionals were quitting their jobs in search of more flexible and fulfilling work, others were prioritising a greater balance between work and life, and some were exploring their entrepreneurial side and starting new side businesses. Regardless of the reason, the pandemic offered professionals a different perspective on work and careers, leading many to pursue freelancing.

But in 2023, more people will likely turn to freelancing because they need to bring in more money given the rising cost of living and inflation. Many may have to turn to freelance work if they have been made redundant, as previously reported by the Freelance Informer.

In Upwork’s study, it was found that more than 80 % of freelancers surveyed went into freelancing to earn more money.

The path to freelancing is not always paved with gold

The not-so-rosy side of freelancing and side hustles was brought to light in a recent Shout Out UK article. If you go to the Freelance Informer IR35 article archives, you’ll read about the injustices felt by the UK’s self-employed.

“Poor Millennials, who were promised a stable life after college, and Gen Z, who watched that promise fall apart under the curse of endless student loan debt, have ever-increasing reasons to look at their hobbies, their passions, and even their bodies as vital income sources,” writes Brendan O’Leary, an author at Shout Out UK.

“Inflation, and rank corporate opportunism, is hurting everyone. Globally, wages haven’t moved for so long that they may as well be living economic fossils. With almost one-third of British workers living from paycheck to paycheck, for many of us, disaster is never too far off.

“In fact, it is not uncommon for the working class to have a second (or even third) part-time job to supplement their income. And while this has more recently begun to be recognised as a failure of the system, somehow side-hustle culture has escaped this indictment.

“Indeed, an increased sense of life satisfaction is a common explanation for the side-hustle boom — and why wouldn’t it be? At least self-employment (despite all of the additional labour, uncertainty and sacrifice), comes with a sense of agency and control,” says O’Leary.

More diversified and highly skilled freelancers

There has also been an increase in professionals seeking an alternative to a single employer and diversifying their revenue streams, according to Upwork.

“Across the labour market, more people than ever are diversifying their income: In 2022, 37% of all U.S. professionals had more than one employer, job, or contract project, for example, holding two part-time jobs with different employers or holding one full-time job and engaging in freelance work,” said the report.

“Diversified workers, meaning those seeking multiple sources of income from a specific mix of traditional employment and freelance work, increased to 17% of the US workforce, up three percentage points from 2021.

“This coincides with high levels among highly skilled and educated professionals. Over half (51%) of all freelancers provide knowledge services such as computer programming, marketing, IT, and business consulting.³ There was also a sharp increase in freelancers who hold a postgraduate degree. In 2022, 1 in 4 (26%) freelancers hold a postgraduate degree, up from 1 in 5 last year,” said Upwork.

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While financial gain is a primary motivator for freelancing, flexibility and seeking a better sense of purpose in their careers were other driving factors. When asked about the reasons for freelancing, ‘to earn extra money’ (83%) and ‘to have flexibility in my schedule’ (73%) top the list.

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These factors reflect a wider shift in how people think about work. Some professionals are entering freelancing as an opportunity to take control of their careers, whether for more flexibility or greater fulfilment. Others are likely using freelancing as a potential stepping stone to a new career or looking to freelancing to create more stability, said Upwork.

Higher satisfaction for freelancers

Although professionals begin freelancing for various reasons, satisfaction levels continue to rise, with 67% of freelancers surveyed more optimistic about their job or career opportunities as a freelancer, said the report. Two-thirds (66%) of freelancers say they feel more stimulated and 68% say they feel happier by the freelance work they do compared to a traditional job.

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Meanwhile, greater acceptance of remote work throughout the pandemic and a shift in professionals’ mentalities around careers are changing how people view freelancing. When asked about freelancing as a career, 73% feel that perceptions of freelancing are becoming more positive, up from 68% in 2021.

Nearly three-quarters (74%) say freelancing has given them greater control over their life, while other benefits include attention to their physical health and work-life balance.‍

Another spillover benefit of having a better work-life balance is in freelancers’ interpersonal relationships. Across the board, freelancers say that it enables them to be available as caregivers and to spend more time on personal relationships.

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Freelancing through economic uncertainty

Freelancing provides many professionals with greater satisfaction in their careers, but it also provides professionals with a sense of stability. Despite a common misconception that a full-time job is the most stable career option, freelancers prove to be slightly more optimistic in the face of an economic slowdown.

When asked about an economic downturn in the next few years, three-quarters (75%) of all professionals said they were concerned. Freelancers were not immune to this, but many feel optimistic about the future despite the concern. Overall, sixty-nine per cent (69%) of freelancers expect their income to increase in the coming year.

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This optimism may be due to the fact that 68% of US freelancers have more than one employer, job, or contract project. With this diversity of income, there is less reliance on a single employer than those with a full-time job feel. Similarly, freelancers see more opportunities available. When asked about freelancing opportunities available today that were not available before the pandemic, 76% say there are more. This is compared to just 57% last year.

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British freelancers and contractors feel the odds are against them

The increase in opportunities is likely why US freelancers have a more positive outlook regarding income and job opportunities. 77% of freelancers feel optimistic about their personal income and salary increase for the coming year, and 80% are optimistic about future job opportunities. Similarly, a majority (61%) of freelancers say they make as much as or more than they would for a traditional employer.

Now, if you were to ask a UK contractor about increased opportunities you may not get such a positive response if they feel they have been forced to take “inside IR35” projects and join the unregulated umbrella company industry due to the blanket banning of self-employed contractors by some large hiring companies, such as those in IT, engineering, banking and construction.

Research from IPSE (the Association of Independent Professionals and the Self Employed) and PeoplePerHour has found that freelancers’ confidence in their own businesses for the next three months has fallen from -11.4 in Q2 2022 to -17.7 this quarter. For context, this represents the lowest level of freelancer confidence in their own businesses for the next three months since the height of the pandemic and lockdown restrictions in Q3 2020.

The index also found that despite the current cost-of-living crisis engulfing the UK amidst rising inflationary pressures, the average day rate charged by freelancers has fallen from £528 in Q2 2022 to £503 over the last three months. In turn, this has now translated into a fall in freelancers’ quarterly earnings, which have fallen from £27,486 in Q2 2022 to £25,887 this quarter.

Factors lowering UK freelancers’ business performance

When analysing the reasons behind the recent fall in freelancer confidence, the FCI revealed that the state of the UK economy (75.9%) was the most detrimental factor impacting self-employed workers. This can be primarily attributed to the current concerns around the UK economy given two consecutive quarters of economic contraction in GDP and inflationary pressures showing no sign of easing.

The other main issues impacting self-employed workers over the past quarter were interest rates (55.6%) and Brexit (51.5%).

Rising debt and costs

Concerningly, over two in five freelancers (42%) are now incurring business debt which is a small increase on Q2 2022, where 37 per cent of freelancers were incurring business debt. Almost one in five freelancers (18%) are now incurring debt via credit cards issued in the name of their self-employed business – slightly up from 15 per cent in Q2 2022.

The index also revealed that the majority of freelancers (85%) now expect their business costs to increase over the next 12 months, with freelancers forecasting an average increase of 15.1 per cent in their business costs over the next year.

Fred Hicks, Senior Policy and Communications Adviser at IPSE (the Association of Independent Professionals and the Self-Employed), said: “Having endured a maelstrom of tax rises and worsening economic conditions, it is unsurprising to see that freelancer confidence continues to fall. But for it to plunge to the levels we saw at the height of the pandemic is yet another worrying indicator that the health of our freelance sector is at risk.

“With costs set to rise but day rates lagging, the Q3 results are a reminder of the impossible choice freelancers must make between absorbing unaffordable cost increases, or risking client retention by increasing their rates.

“From programmers and designers to engineers and consultants, freelancers provide their services in all corners of the economy – a decline in the sector would be felt just as widely. Government must avoid piling further pressure on the already strained freelance sector at the next Budget and instead take the opportunity to deliver bold measures to support this dynamic and talented segment of the economy – from meaningful improvements to IR35 legislation and firm action to clamp down on late paying clients.”

Freelancers still have the upper hand if they choose to use it

That said, some contractors in high demand will have had to negotiate their rates to make up for the umbrella company fees they didn’t have to pay before.

That said, those that are only going for jobs outside IR35, still have the ability to set their own rates. Upwork said 43% of freelancers surveyed said they raised their rates during the past year. The top reasons that they raised rates were due to professional experience (39%), economic conditions (37%), their services being in higher demand (36%), and keeping up with competitive rates (34%). The ability to raise their rates is likely why freelancers are over thirty per cent (36%) more likely to feel satisfied with the amount of money they make for the work they do than non-freelancers.

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The combination of positive perceptions of freelancing, more opportunities, and control of their rates, instils confidence in many freelancers.

Future of freelancing

Freelancing continues to grow as a viable career choice for many US professionals, especially those seeking greater flexibility and control. We can safely say that about the UK.

“It also bodes well that younger generations are embracing freelance work en masse,” said the Upwork report.

The report said that in 2022, 43% of all Gen-Z and 46% of Millennial professionals freelanced.

Yet perhaps influencer content is providing the lion’s share of freelance work for this age group.

“The rise of influencer content is also attracting younger people to freelance,” said Upwork.

Its survey estimated that 23% of all freelancers say their work entails creating influencer-style content, which rises to 27% and 29% of Gen-Z and Millennial freelancers, respectively.

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In true American optimism, which we could all use these days, the Upwork report concluded:

“With the continued shift in perception and the increase in opportunities, freelancing is poised for a bright future. That’s why 9 in 10 (91%) freelancers believe the best days are ahead for freelancing.”

Report graphics and stats are to be credited to Upwork, Statista and IPSE