Title: Anti-Contractor ABC's Impact on Employment Levels According to Recent Research
For years, it's been evident that the ABC test, championed by the left as a solution to misclassify employees as independent contractors (ICs), has been a leap of faith. Advocates have assumed that a drastic shift in established systems would yield the desired outcomes. however, a new multi-state economic analysis tells a different story.
For decades, the U.S. Department of Labor and state labor agencies have enforced existing laws prohibiting misclassification, and courts have applied standard guidelines. While complaints have surfaced, they've been manageable with political and agency will.
The ABC test, a holdover from the 1930s work environment, has resurfaced as a supposedly simple fix. Developed by the left, the test relies on a three-prong approach that essentially categorizes anyone performing tasks for a company within its normal operation as an employee rather than an IC.
This isn't solely about rideshare drivers. If you combine all platform gig workers, you'd only account for 10% of the nation's ICs. There are 11.9 million independent contractors who offer services to companies, either on a self-employed or wage/salary basis. According to government data, 7.4% of total employment consists of these contractors, while 22.8% of multi-job workers engage in contracting as their secondary job.
California's AB-5 law enforced the ABC test throughout the state, resulting in significant hardships for self-employed individuals. The legislature eventually exempted over 100 industries and occupations due to the law's consequences.
A study published by the free-market-oriented Mercatus Center at George Mason University offers fresh insights. Labor economist Liya Palagashvili and researcher Revana Sharfuddin conducted this research, and their preliminary findings are alarming.
Using a Difference-in-Differences (DiD) approach and event-study framework, Palagashvili and Sharfuddin analyzed the effects of the ABC test on various states. The researchers found that the implementation of the ABC test led to a dip in W-2 employment (4.73%), self-employment (6.43%), and overall employment (4.79%) in both short-term and long-term scenarios (up to 15 years).
Occupations with high shares of independent contractors saw the most significant employment declines. The researchers noted that businesses that heavily relied on both W-2 employees and ICs might have closed or downsized due to the ABC test. Some companies might have moved operations to non-ABC test states, resulting in W-2 employment growth in these areas.
While the research does not pinpoint the exact reasons for these declines, it suggests potential explanations. The study's findings remained consistent even after accounting for the financial crisis and pandemic. The ABC test's overall impact on employment warrants reconsideration, particularly by the incoming administration.
Enrichment Data:
- Decline in W-2 Employment: The ABC test led to a 4.73% decrease in traditional (W-2) employment, a contrast to the intended goal of increasing the share of employees, as policymakers hoped the ABC test would induce employers to reclassify independent contractors as employees to comply with the law.
- Decline in Self-Employment: Self-employment fell by 6.43%. This decline in freelancing and gig work can be attributed to the ABC test's difficulty in allowing workers to engage in independent contracting.
- Overall Employment Decline: Overall employment dropped by 4.79%. This reduction in employment is evident in both the short-term and long-term (up to 15 years) after the ABC test's implementation.
- Impact on Industries with High Shares of Independent Contractors: Occupations with high shares of independent contractors experienced the largest employment reductions. This suggests that the ABC test disproportionately affects industries that heavily rely on independent contractors.
- Businesses Closing Down: Anecdotal evidence suggests that businesses that had both W-2 employees and contractors shut down due to the ABC test. This led to a shift in operations to states without the ABC test, resulting in W-2 employment growth in these areas.
- Robustness of Results: The study employed several robustness checks and excluded states that passed an ABC test immediately before, during, or after the financial crisis and the pandemic. The findings remained consistent even after these exclusions.
In light of the study conducted by Labor economist Liya Palagashvili and researcher Revana Sharfuddin, it's clear that implementing the ABC test led to a significant decrease in W-2 jobs, self-employment, and overall employment across various states. Jobs unions might need to reconsider their stance on the ABC test, as it appears to have negative impacts on the independent contractor workforce, accounting for 10% of the nation's ICs and 7.4% of total employment. This ab test, championed as a solution to misclassify employees as independent contractors, seems to have unintended consequences.