California legislators are close to voting on a bill that would reclassify hundreds of thousands of independent contractors as employees. If passed, this bill will destroy many very productive economic opportunities, and substantially restrict free choice for individuals.
The only potential net beneficiary is the state government, which would receive a new source of unemployment insurance and disability insurance tax revenue. Not surprisingly, California Governor Gavin Newsom has supported the bill, even though there is no economically justifiable reason to require these businesses to pay these taxes.
The bill is intended to regulate labor relations in the gig economy, including rideshare companies such as Uber and Lyft. These businesses succeed because they efficiently match drivers with riders using remarkably innovative software. Forcing worker reclassification on innovative businesses that have created new self-employment opportunities will significantly increase the fees paid by consumers of the gig economy, reduce demand for these services, and reduce take-home pay for those working in these industries.
In a Labor Day Op-Ed, Newsom wrote “Employers shirk responsibility to safety net programs like workers’ compensation and unemployment insurance. Taxpayers are left to foot the bill.”
This statement is unfair to the businesses that Newsom criticizes, and also is flawed economic analysis. One reason is unemployment insurance, which should be essentially irrelevant for independent contractors. The purpose of unemployment insurance is to provide benefits to a worker who is laid off by their employer through no fault of the worker. But unemployment pertains to almost no gig workers or other independent contractors. This is because those workers choose how much they will work, and when to work. A “layoff” simply doesn’t exist. An Uber driver may be fired for cause, but they are not laid off. There is no incentive whatsoever for Uber or Lyft, within their current business models, to tell a qualified driver that they no longer can drive for them.
Disability insurance is a different issue, though in principle addressing this issue this does not require reclassifying independent contractors as employees. If the state really wants all workers to be covered by the state’s disability fund, then all they need to do is require workers to buy into the disability. From the perspective of the worker, it is irrelevant whether the company deducts that amount and pays for it, or provides it to the worker as salary, and the worker pays for it.
Interestingly, the state never seemed to care much about worker safety for independent contractors in the past. Rather, this is simply the case of the state government seeing a new, untapped revenue source that is theirs for the taking, and wrapping it up in a package of worker safety and private sector responsibility to increase the likelihood of it passing.
But even revenue-hungry governments must worry about killing the goose that lays the golden egg. Understanding economics means understanding incentives, and if this bill passes, you will see the incentive to replace workers with machines skyrocket. read more
h/t Dan Bongino