The U.S economy has been slow to grow employment and it has left paychecks without noticeable increases. In the five most recent quarters, labor productivity decreased by 3.1%. Flat wages are to be expected when labor productivity is stalled.
Besides increasing economic output, productivity could be increased by better organized workflow, improving work skills, increasing the pace of production, sharpening focus to the work at hand, and lowering overhead costs. To hike productivity, many employers are resorting to use of independent contractors who deliver strong advantages.
Compared with full-time employees, independent contractors allow greater flexibility in workflow organization, and they avoid the 25% cost penalty associated with employee Social Security, Unemployment Insurance, Medicare, Affordable care Act and Workers Compensation premiums. The advantages are even deeper when comparing independent contractors with unionized employees — due to unions’ propensity to resist the restructuring of workflows and take the tasks of others. When production costs are lower, they allow more flexibility in pricing, which adds a huge advantage when negotiating with cash-strapped customers.
Europe and China are two major markets for U.S. exports. Recently the European Union has experienced a slowdown verging on recession in some of the member countries. Greece’s financial antics have magnified Europe’s uncertainties and distracted focus away from stimulating the European economies by reducing interest rates. Europe’s slowdown and financial tactics have increased the U.S. dollar’s strength and curbed European imports. Both factors have hobbled U.S. exports.
China’s growth rate has dwindled to near 7%, small for that Asian growth engine. China’s reduced growth rate will shrink its volume of exports purchased from the U.S., Europe, and other advanced economies. To the extent we can achieve higher productivity, it helps us offset reductions in Chinese demand because our flexibility with prices makes the U.S. a more attractive source for exports.
The importance of productivity, and thus pricing flexibility, also applies to the U.S. domestic marketplace. The lower that prices can be set for services and products, the more Americans can afford them. Airbnb, Task Rabbit, Uber and other “sharing economy” services have been remarkably successful. They have earned loyal consumers precisely because they offer service at prices the consumer considers attractive. It must be stressed, the consumer is rightfully focused on the actual service and its price, and they are not focused on the government programs which don’t play a role in producing the service.
Some of the independent contractors who work in the sharing economy may want protections and benefits similar to those available to employees, but those programs would need some degree of customization. For example, “workers compensation” would need to replace income from multiple sources, instead of solely the income from the job where the worker was injured.
Further program customization would be desired because most independent contractors will refuse to pay the 25% employer’s premium on top of a matching 25% employee premium – merely to be eligible for a set of baroque program benefits specified by politicians and insurance companies. Independent contractors may also deeply resent their programs being administered by highly paid unionized bureaucrats – evidently unavoidable in any government agency.
Some governments have decided to skip over the challenge of customizing workplace benefit programs to suit independent contractors. Instead, they decided to declare the independents as “employees.” That flourish of arrogance allows government to tax these workers without further thought and spend on programs that do not fit their needs well.
Most governments don’t care about macroeconomics and don’t understand the role that independent contractors play in the U.S. economy. Elected officials have an opportunity to treat the economy and independent contractors right, and they should.