Why Not Just Get Rid of Labor Law?

While politicians seem to never tire of proposing new ways to regulate the workplace, I want to propose a radically different idea: get government out of the workplace altogether. If that’s too radical for you, here is a compromise proposal: allow parallel systems under which workers in the same industry can choose to work as employees or work as independent contractors in an essentially unregulated labor market.

Public awareness of the “gig economy” seems to have started with Uber, a company with 4,000 employees and 160,000 drivers who are not employees. A class action lawsuit in California seeks to have the drivers reclassified as employees so they can “get benefits” they are not now getting and be “protected” from employer abuse.

There are two big problems with this lawsuit: (1) it’s based on bad economics and (2) Uber drivers don’t want to be employees.

Let’s take the second issue first. I must have read a dozen editorials and news stories about Uber—all implying that we have a new class of workers who all of a sudden are being denied all the benefits of being employees, just like … hmmm … just like whom?

Did you know that just about every taxi cab driver in the United States is an independent contractor? That’s right. In this industry—that has been around for longer than any reader of this column has been alive—the drivers have never been employees. What makes Uber different is not that the drivers are independent contractors. It’s that Uber is using modern technology to compete in an industry that has become stodgy and insensitive to consumer needs.

Why are taxi cab drivers independent contractors? Because they prefer it. And so do Uber drivers. But how can that be? Employees get fringe benefits like health insurance and 401(k) matches. They are assured of a minimum wage. They get time-and-a-half for overtime—by law.

The answer is that the drivers—regardless of their formal education—are smarter than the news reporters and the opinion columnists. The drivers know there is only so much money you can get from the passengers. If some of this money goes for fringe benefits that means less take home pay. This insight has been confirmed by just about every economic study of the issue that has ever been done. Employee benefits and workers’ wages are dollar for dollar substitutes. So becoming employees would not create any net gain for the drivers.

Meanwhile, there are tax advantages of not being an employee. Independent contractors, for example, can take deductions that employees typically cannot. And (ironically), since the tax relief for employer-provided health insurance is smaller than the tax credits being offered in the (Obamacare) exchanges for everyone who is earning a below-average income, millions of workers are actually better off buying insurance on their own.

The Fair Labor Standards Act of 1938 was passed at a time when the country was in the middle of the Great Depression. If there was once a need for it, that need has come and gone. Today we tell teenagers they can’t be employees if they can’t produce $7.25 worth of goods and services in an hour. But if you are an independent contractor—say an artist, actor, writer, musician and, yes, even a taxi cab driver—the federal government doesn’t care how much you earn.

Other labor market regulations work pretty much the same way. Employers can’t discriminate on the basis of race, religion, age and God knows what else. But if you are hiring a handyman for home repairs or a gardener or a maid or hailing a taxicab, you can discriminate all day and all night. If your employer supplies you with a ladder, there are all kind of safety regulations that apply to it. If you work for yourself and supply your own ladder, it can be as safe or unsafe as your like.

Does this mean that the non-employees are at a huge disadvantage? No, it’s the other way around. As I explained at Forbes the other day, markets are better at dealing with these issues than government. The evidence suggests that Occupational, Safety and Health administration (OSHA) regulations have had virtually no impact on actual worker safety. And there is no evidence that antidiscrimination laws have affected the average wages of women, blacks, Hispanics or anyone else.

However, these laws and regulatory agencies do add to the administrative costs of employment. Independent contractors and their clients avoid those costs.

This may be one reason why the unregulated sector of the labor market is growing by leaps and bounds. Writing in The New York Times Noam Scheiber notes that:

The number for the category of jobs mostly performed by part-time freelancers or part-time independent contractors, according to Economic Modeling Specialists Intl., a labor market analytics firm, grew to 32 million from just over 20 million between 2001 and 2014, rising to almost 18 percent of all jobs.

Another study, commissioned in part by the Freelancers Union, estimates that about one-third of the work force, or 53.7 million people, now do freelance work, an increase of 700,000 from a year earlier.

All this is being helped along by a relatively new phenomenon: computer apps. Writing in The New York Times, Natasha Singer says:

Ride-hailing apps like Lyft and Uber, odd-jobs marketplaces like TaskRabbit, vacation rental sites like Airbnb, and grocery-shopping apps like Instacart have clearly made travel, lodging, home renovation and dining more efficient for millions of people.

Add medicine to that list. Uber-like house calls are already available in several cities. Unless government gets in the way, they will soon be available to you.