David Henderson has a couple of recent posts analyzing possible upcoming regulatory changes affecting gig workers. Reading his posts triggered the little memory imp that lives in the back of my brain, and brought to mind an additional point worth making.
At the outset, however, I do want to give some credit to the Vox writer David cites, Rachel Cohen. David pointed out in his Hoover article that the vast majority of gig workers value the flexibility of gig work and prefer it over traditional employment. Cohen acknowledges this too, writing:
Some groups representing freelancers and small businesses also urged the NLRB against revising its contracting standard, worried they would lose their prized independent status. They pointed to government surveys, like a 2015 GAO report that found more than 85 percent of independent contractors and those self-employed appeared content with their status. In 2018, the Bureau of Labor Statistics reported 79 percent of independent contractors preferred their contracting arrangement over a traditional job.
The Small Business and Entrepreneurship Council issued a statement on Tuesday calling the Labor Department’s rule “out-of-touch with the modern economy and how people want to work.”
Even acknowledging this point is a breath of fresh air to read, at least from a Vox article. However, there’s another downside to the proposed regulations which deserved a mention – these new rules will cost a lot of people their jobs. In her Vox article, Cohen also writes:
That is, one effect of this regulation will be to make people more expensive to employers as they move from contractors to employees. And as they get more expensive, we would expect the quantity of workers employed to decrease. I would expect a writer at Vox to be particularly aware of this point, and not just because it’s elementary economics that anyone who reports on economics issues should be aware of.
A few years ago, when California initially passed AB5, Vox released an article praising the new law as an unambiguous victory for gig workers. Unlike Cohen, the author of this article doesn’t even hint at the possibility that this legislation might have any downsides. But flowery analysis can only obstruct economic reality from view – it doesn’t prevent economic reality from taking effect.
Appropriately enough, “vox” means “voice.” Vox used its voice to describe AB5 entirely in beneficial terms, but as the old saw goes, actions speak louder than words, even at Vox. Remember those freelance workers mentioned by Cohen in her article? That’s what woke up the memory imp in my brain. After some quick Googling, I was able to rediscover an article I read just before AB5 was scheduled to go into effect in California. The key point:
Vox Media, a large digital media company with an array of niche sites, abruptly terminated hundreds of freelance writers in the state of California.
The company will cancel its agreements with about 200 contractors to comply with a new law that goes into effect on January 1, 2020. The law is known as California Assembly Bill 5—commonly referred to as AB5. The law was enacted to prohibit corporations from misclassifying workers as independent contractors instead of employees…Vox intends to replace the freelance writers with roughly 20 new part-time and full-time staffers.
The author of that article goes on to point out that not only was this devastating to those whose contracts were cut, it would also hurt Vox, too:
Given Vox’s own actions when regulation of this very kind is on the horizon, I don’t think it’s too much to ask of Vox writers to preach what they practice.
Kevin Corcoran is a Marine Corps veteran and a consultant in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason University.
READER COMMENTS
Vivian Darkbloom
Nov 25 2022 at 1:57pm
“One major legal entitlement employees enjoy is the right to join a union. Another is the right to be paid at least the minimum wage, and for businesses to pay a portion of their Social Security tax.”
“That is, one effect of this regulation will be to make people more expensive to employers as they move from contractors to employees.”
I wouldn’t jump to that conclusion too quickly, particularly as regards the cost of Social Security (and Medicare and UI). Only counting SS and Medicare, that would amount to an employer cost of 7.65 percent. All else equal, wouldn’t an employer be willing to pay an independent contractor 7.65 percent to account for that? And, wouldn’t a self-employed person demand it? Or, is there seriously something wrong with the market for labor? I also suspect the minimum wage is an issue in only a very small percentage of cases (certainly not writers for Vox?).
“Given Vox’s own actions when regulation of this very kind is on the horizon, I don’t think it’s too much to ask of Vox writers to preach what they practice.”
I would agree with that if it were true that Vox writers are the same persons who make the hiring and business decisions at Vox. I doubt it.
Kevin Corcoran
Nov 25 2022 at 2:25pm
Hey Vivian –
Regarding your first point, the benefits mentioned by you (and by me, in the brief excerpt you quote) are only a small part of the increased expense employers would face if forced to convert contractors into employees. There are also additional legal and regulatory statues which apply to the latter but not the former, including unionization prospects. Employees can be much riskier to attempt to get rid of than contractors (particularly in a state like California!). Health benefits, paid vacation, and overtime are also a factor. You’re correct that in many cases, contractors might collect what would otherwise be employer benefit contributions in the form of extra pay, but if contractors must be converted into employees, that means either that portion of their pay will have to be cut and converted into those contributions, or their jobs will be terminated. Given that wages tend to be sticky downwards, it’s far more likely we’d see the latter than the former. Downwardly sticky wages are in fact, as you say, something that is “seriously..wrong with the market for labor.”
Regarding your second point, I disagree. If a reporter is reporting on an upcoming regulatory change, and their own publication has responded to that regulation by cutting hundreds of jobs, I think it’s reasonable to expect the reporter to mention that when printing up their story. I don’t see any reason that should only be the case if the reporter themselves was responsible for that decision. I think it’s reasonable to expect reporters to be willing to preach what their publication practices – if not preaching in the sense of advocating that practice, at least in the sense of, well, reporting it.
Vivian Darkbloom
Nov 28 2022 at 12:50pm
Kevin,
Regarding your first rejoinder, I already addressed that below in my reply to David Seltzer. I don’t dectect much, if any, difference between your last comment and mine. The exact amount of an employee benefits package was not crucial to the point I made.
Regarding the second point (“it’s not too much to ask Vox writers to preach what they practice”), again, the “practice” part was not within Rachel Cohen’s authority because she is only a writer. Normally, the job of writing and the business end of journalism are separate by design. Not only was it not within her function at Vox, she didn’t even join Vox until April 2022 which was almost two and one half years after that Forbes article appeared and the layoffs at Vox occurred.
You now contend that instead of “preaching what she practices”, Cohen should have mentioned those earlier Vox layoffs. Given the fact that she wasn’t at Vox at the time, she might not have been aware of them (also, editors seem to be a rare commodity today). Even so, given her function, I don’t view this as hypocritical—ironic, perhaps.
At the end of the day, you and I can agree that the proposed labor rule is not a wise one for the reasons mentioned in Henderson’s earlier post (and other reasons). But, I don’t agree with your contention that the writer wasn’t preaching what she practiced.
Kevin Corcoran
Nov 28 2022 at 3:00pm
Hello again Vivian!
You write:
Perhaps not, but it is crucial to the overall point I was making. At the risk of going in circles, let me try to flesh it out again.
You said that you “wouldn’t jump to that conclusion too quickly”, with the conclusion in question being my contention that the new regulations will “make people more expensive to employers as they move from contractors to employees.”
You suggested that, for example, what would ordinarily be employer contributions to things like SS and UI are amounts “an employer be willing to pay an independent contractor” for in additional wages, and we would expect a “self-employed person” to “demand it.” So far, so good.
Let’s say the typical employer contribution to SS and UI and all the rest, plus the value of things like greater flexibility, all adds up to some amount $X. Let’s also say a given contractor is being paid some amount $Z, and that, as you suggest, $X is part of what goes into the $Z in wages agreed upon by the employer and contractor. Then, a new law is passed which forcibly reclassifies contractors into employees. Now, employers are compelled to start paying the newly designated employees benefits and contributions equal to $X. If wages in the labor market were perfectly flexible, then the newly minted employees would gain $X in benefits and contributions, and their new wage would be adjusted to $Z – $X. However, if wages are sticky downwards (which they are, in real world labor markets), then wages would fall by less than $X, or not at all. This, in turn, would make the newly minted “employees” more expensive than they were as “contractors,” which, in turn, would lead to job losses. Hence why Vox, unsurprisingly, fired hundreds of independent writers.
Regarding your second point, I still disagree. I suppose I could have phrased the sentence in question more accurately as “I don’t think it’s too much to ask of Vox writers to preach what Vox media practices” – that would be fair. (I don’t think anyone would have read my original phrasing as a claim that the practice in question was somehow due to an individual reporter’s personal authority, but still, the new phrasing is more accurate.) And I still don’t see any reason why she would need to have been personally responsible for the layoffs caused by these regulations in order for it to be a reasonable expectation for her to mention them in a story about those regulations. Nor do I find much reassurance in the suggestion she might not have even been aware that it happened. If a Vox reporter is writing a story on the effects of new regulations in the California labor market, and it never occurs to her to even check how her own California-based employer might have responded to those regulations – well, I’d say that just means Vox needs better reporters. Or perhaps better editors. Or both.
Vivian Darkbloom
Nov 29 2022 at 7:18am
Kevin,
It appears that you agree, in general, that all else equal, the total comp package for a contractor should be roughly the same as for an employee. If you suggest otherwise, you would appear to agree with those who argue those contractors were being “exploited” in comparison to an employees!
Regardless, I think you are wrong about the transition from contractor to employee. If, say the employee gets a package of $80 normal wages and $20 additional benefits and the contractor gets a package of $100, the cost to the employer is the same( $100) in each case. You wrote: “That is, one effect of this regulation will be to make people more expensive to employers as they move from contractors to employees”. If the employer is required to convert that contractor position to that of an employee, then there is *nothing* about the theory of “sticky wages” to suggest that the employer needs to offer that contractor $100 plus $20 ($20 more than his existing employees!). At most, it would suggest the total package would not tend go below $100, the same as that of all other similar employees and the ex-ante position of the contractor. It certainly doesn’t suggest it must go higher.
There is another factor here that we have not yet discussed, particularly with respect to Vox and its journalist freelancers. Those freelancers are not paid “wages”. Often, if not typically, the deal would be “I’ll pay you $X for an article or $X for each word or page published. Freelance contractors are not paid wages or salaries. And, as such, those freelancers are not engaged full-time. Thus, any comparison is necessarily very difficult to make; however, I trust a business and a potential contractor are able to come to some meaningful economic arrangement. Thus, the rather dramatic-sounding conversion of 100 freelance positions for 20 full-time employee positions may have reflected nothing other than the fact that 100 *part-time* assignments or “piece-meal” gigs were converted to 20 full-time employment positions without any significant difference in the total amount of work performed or compensation paid. We simply don’t have enough facts to know.
As to “I don’t think it’s too much to ask of Vox writers to preach what they practice”, I won’t belabor the (valid) points I’ve already made and I suspect we’ll need to continue to disagree; however, I’m pleased that you now think that language should have been different.
Cheers,
Viv
Kevin Corcoran
Nov 29 2022 at 11:08am
Hello again Vivian!
One last go for me, because I suspect otherwise we’ll really end up going in circles, and I’ll keep it focused on just one issue – I think you’re wrong about the implications of sticky wages.
You suggest that employees and contractors would both get total compensation of $100, and that for employees it would be $80 in wages and $20 in benefits, and for contractors it would be $100 in benefits. Agreed. But you suggest the most that would happen as a result of sticky wages is that the former contractor-turned-employee would not see their total compensation go below $100. This is wrong – that’s why the idea is called sticky wages, not sticky compensation. As a result of the new law, the employer must pay $20 in benefits now, so the only way for the new employee’s compensation to not exceed $100 would be for their wages to fall to $80. And claiming that their wages will in fact fall by $20 in order to keep their total compensation at $100 just amounts to claiming that wages aren’t sticky downwards.
Vivian Darkbloom
Nov 29 2022 at 2:15pm
My last words, Kevin:
“…that’s why the idea is called sticky wages, not sticky compensation.”
Exactly. But, your timing of the events is wrong—you forget that contractors do not receive wages. It is only after they become employees that they would receive wages. In addition, the concept of “sticky wages” refers to general labor market conditions and not specific compensation cases as this would be.
I suggest that if this were to become an issue and a former contractor would be converted to an employee and he demand he get his new wages (cake) and it it, too (benefits) in a total amount exceeding the theretofore existing employee wages, that would be an issue for the courts, not economic theory. I’m willing to bet on the outcome.
Thomas Lee Hutcheson
Nov 25 2022 at 2:26pm
But by tying health insurance to “employment” we distort the decision of which skill/wage level to “employ.” The Labor department seems to be trying to redefine “employment” so as to overcome or mitigate the problem. A better solution would be to modify ACA to make it as good as employer “provided” insurance.
robc
Nov 25 2022 at 3:32pm
The content of articles is a business decision.
Vivian Darkbloom
Nov 25 2022 at 4:14pm
Do you think Kevin Corcoran made a “business decision” when he wrote this post? Did someone at Liberty Fund tell him what to write?
robc
Nov 25 2022 at 8:12pm
Is Kevin being paid, then yes. If not, then still maybe yes.
And probably no to second question.
David Seltzer
Nov 26 2022 at 5:31pm
Vivian said “I wouldn’t jump to that conclusion too quickly, particularly as regards the cost of Social Security (and Medicare and UI). Only counting SS and Medicare, that would amount to an employer cost of 7.65 percent. All else equal, wouldn’t an employer be willing to pay an independent contractor 7.65 percent to account for that? And, wouldn’t a self-employed person demand it? Or, is there seriously something wrong with the market for labor? I also suspect the minimum wage is an issue in only a very small percentage of cases (certainly not writers for Vox?).”
SS and Medicare are a small percentage of a total compensation package for an employee with a base of sixty thousand per year.
Assume: Direct Compensation = $62,000. Indirect comp, (SS Medicare Worker’s comp) = $5500. Indirect benefits, ( 401k match, insurance, disability, etc.) = $12,000.
Total comp package = $79,500. Indirect comp + indirect bennies = 22% cost to the employer. Having run several enterprises, I preferred contact workers. A feature not often mentioned, if I was dissatisfied with their work, I just didn’t renew a contract. Much easier than firing a union employee.
Vivian Darkbloom
Nov 27 2022 at 2:22am
David wrote:
“Having run several enterprises, I preferred contact workers. A feature not often mentioned, if I was dissatisfied with their work, I just didn’t renew a contract. Much easier than firing a union employee.”
I agree. And, this is probably the main reason to hire an independent contractor than an employee. Also, the for the independent contractor, he or she is free to pursue other work simultaneously. An employee may be severely restricted. There are a lot of mutual considerations.
David also wrote:
“SS and Medicare are a small percentage of a total compensation package for an employee with a base of sixty thousand per year”.
I also agree. In fact, I wrote “*Only counting SS and Medicare*…” to acknowledge that point and to keep the example simple. But, none of this counters the basic point I made: You cannot just assume that because the employer is required to pay certain benefits in the amount of $X to an employee, the cost of hiring an independent contractor is going to automatically be $X lower. (In fact, considering other factors such as the ability to terminate the independent contractor more easily, a rational David Seltzer might pay him or her just a little bit more in total comp??).
Another point regarding the classification rules: The IRS has long had rules on how to classify a person as an employee or an independent contractor. These are derived from common law rules and, at the end of the day, are subjective. One doesn’t have complete liberty today to willy nilly call someone an independent contractor. In many, but not all respects, the proposed Labor Department rules track the existing IRS rules, but they do tilt the analysis more likely to employee status (and perhaps add additional penalties).
https://www.irs.gov/newsroom/irs-reminds-business-owners-to-correctly-identify-workers-as-employees-or-independent-contractors
nobody.really
Dec 2 2022 at 8:05am
Nice point about the prevailing legal distinctions between independent contractors and employees, and the ambiguity regarding the boundary between these categories.
Corcoran wrote–
The thrust of his argument is that government intervention in labor markets may produce benefits AND costs. That said….
In discussing Vox’s words regarding AB5, Cochran appropriately acknowledges that Vox offered a variety of words on the topic, some more nuanced than others. In particular, he may have missed this Vox article which casts doubt on the idea the AB5 had the adverse effects Corcoran alleges.
Specifically, the article argues that AB5 was adopted in the context of a recent California Supreme Court decision establishing an especially strict and inflexible standard delineating the boundaries between independent contractors and employees. According to the article, the COURT DECISION produced the adverse consequences Cochran complains of; AB5 was designed to MODERATE those consequences. AB5 may not have gone far enough in moderating those consequences, but blocking/repealing the statute would only make things worse.
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