Government’s Share in the Sharing Economy

The “sharing economy” is a fanciful name for one version of commonplace independent contractor arrangements.  “Sharing” eludes to the multiparty use of an asset such as car or house bought by an individual (or small group).  Intermediaries such as UBER, Airbnb, or Peers provide promotional and booking services to the asset owner in return for a piece of the revenue.  However there are far more individuals without assets who contract with a firm to work for compensation by the hour, or by production, or on a retainer.  These people have traditionally been called independent contractors, although some in government want them reclassified as dependent contractors, fractional employees, or as California favors, employees.

Aside from mere legalism, what separates independent contractors from employees is the intent of the firm buying the contractor’s assistance.  A firm can start production and stop production using contractor help without legal entanglements (e.g. unemployment insurance) that would apply if using employees. The firm may want to offer pension contributions or 401k matching contributions to employees whose skills are otherwise difficult to obtain and retain, but not to contractors whose job skills are commonplace.  The firm may choose contractors as a means to avoid the usual production rigidities, workflow uncertainties and higher costs of unionized employees.

Other government program costs apply to the use of employees but not to the use of independent contractors.  Mandatory employee benefits that employers must pay include – unemployment insurance (can cost 1% to 8.2% of pay), workers compensation insurance (typically 1.25% for a low risk job), Social Security contributions (6.2%), Medicare contribution (1.45%).  Those add between 9.9% and 17.1% to employee costs.  The real elephant employers must carry for employees is the Affordable Care Act.  The employer cost per employee can easily be $5,000 per year, or 10.6% of the annual average wage.  The high overhead cost (20.5% to 27.7% of pay), lower workflow flexibility, and lower ability to apply incentives where they would be most efficient can make independent contractors the superior strategy.

In a late June interview, Senator Mark Warner voiced concerns for those working in the “gig” economy, i.e. independents with little employment security.  He identified a need for institutions that might provide reliable work, health and pension arrangements.  He suggested “hour-banking” might help some people secure insurance coverage, and he suggested “Peers” might be a useful model for lining up work opportunities.

Senator Warner also pointed to the Obamacare exchanges as a possible model for delivering disability and workers compensation coverage.  Unstated was how affordable the premiums might be, especially in combination with the so called “Affordable” Care Act premiums.  If Congress pursues this idea, fatter federal agencies and proposals for subsidies will not be far behind.

Missing from Senator Warner’s musings is an admission that it is the cost of government programs and the regulatory rigidities that pushed many employers to favor independent contractors.  To some legislators, every issue cries out for more government programs.

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