It’s fair to say that the latest stats on the labour market from the Office for National Statistics were nothing short of concerning.

Vacancies are up, long-term unemployment is up, employment is down and the economically inactive – those not looking for work or not able to work – has reached its highest rate since 2015.

And this is only continuing a worrying trend. Labour market participation has been heading in the wrong direction since the pandemic; despite government making it a priority to re-incentivise work for this cohort.

But could this actually present an opportunity for contractors to plug the talent gaps in the market?

We explore how contractors could help alleviate the concerns of clients and how the Chancellor could make this happen.

An opportunity for contractors

Clients are undoubtedly finding it harder to plug gaps in their workforce. Whilst many of these unfilled vacancies are in lower-skilled roles, this has an important impact throughout the supply chain.

This scarcity of skilled professionals can result in the hiring or promotion of under-qualified candidates, or businesses putting their projects on hold altogether.

This is where contractors come into their own. They help businesses to de-risk investments in new projects, with clients safe in the knowledge that they will be getting specialised expertise on a flexible basis.

So why are contractors now less likely to be working?

Simply put, they’re just not incentivised to return to the labour market.

IPSE’s research now shows that freelancers are less likely to be working. Back in Q3 2023, 84% of freelancers reported they were working. This has since fallen to 81% in Q4 2023 and then 75% in the interim data from our Q1 2024 report.

We even compared the data year-on-year to account for seasonal fluctuations, and it is clear that this is a standalone trend.

IR35 continues to be the greatest detriment to the participation of freelancers in the economy. Around a third of company directors left the market after the imposition of IR35 reforms in 2021 and a great deal have still not returned.

Similarly, clients are still exercising caution when engaging the self-employed due to fear of falling foul of these notoriously complex rules – stifling the pairing of freelance talent with clients and ultimately holding back wider economic growth.

The legacy of the pandemic is also a factor. Those with healthy pensions perhaps realised it was feasible to retire early; others able to balance childcare or caring responsibilities for the first time in their working life. It challenged our conventions on work in a way not seen since Ford introduced the five day working week in 1926. For some, work ultimately became less of a priority.

With the rigidity of the 9-5 grind, the autonomy of self-employment should be an attractive option and we should be seeing a burgeoning population of one-person businesses.

Instead, we’ve lost around 700,000 self-employed businesses since the pandemic and we’re yet to see the sector return to pre-pandemic levels.

For more information on the IR35 rules, we've updated our guide on how to navigate the rules.

Chancellor, the power is in your hands

Much attention has been paid to the government’s ‘back to work’ drive. But it’s now perfectly evident that it isn’t working.

Much bolder action is required to remove many of the barriers that are preventing a return to work and Jeremy Hunt has a number of levers to pull to do so.

IR35 is the obvious one. Government must look again at the real-world impacts of the reforms and find an alternative or scrap it altogether. We should be encouraging clients to engage freelancers, not implementing rules that make it thwart with challenges.

You can read the thoughts of IPSE's Director of Policy, Andy Chamberlain, on the need for a change to the IR35 rules.

Targeting the over-50s with saving for later life incentives is another option that the Chancellor has already targeted, but this needs to go further.

IPSE has called on the government to tweak the Lifetime ISA to help older workers – who are more likely to be self-employed – can make better use of it. It’s in everyone’s interests to ease the reliance on the state pension and if at the same time, we can encourage those with healthier pots to share their expertise with businesses once again, then it’s a win-win.

Another lever for the Chancellor is the Trading Allowance. This is the tax allowance currently available for employees that also have a side hustle. Almost half of all employees reported that they were interested in adopting a side hustle back in 2022, so there’s a clear demand for establishing these ventures.

We also know that this can act as a potential route to a fully-fledged self-employed business. Increasing this allowance from £1,000 – which has remained frozen for the past seven years – to £5,000 could drive these casual freelancers to take on a more full-time contribution to the UK economy.

Finally, childcare continues to acts as a barrier to work. The government has attempted to introduce much-needed reforms on childcare provision, but providers don’t have the staff or spaces to deliver the funded hours promised by the government. In addition, the high cost of childcare continues to make working and paying for childcare net negligible for many.

Whilst self-employment does allow for parents to balance some of their childcare responsibilities, many could be working more if it were for childcare support.

Have you say on how to incentivise the self-employed

IPSE is currently in the process of drafting our manifesto for the 2024 election and we’d really appreciate your thoughts on what the government could do to encourage labour market participation amongst the self-employed.

Please email [email protected] to let us know what you want to see a future government prioritise.