Punching In: Worker Classification Tests’ Economic Effect Mixed

Monday morning musings for workplace watchers.

New Worker Classification Research|Union Membership Stats Coming

Rebecca Rainey: California’s strict worker classification law—known as AB5—resulted in a 4% decline in employment in the state, a new paper from the Mercatus Center at George Mason University found.

Researchers Liya Palagashvili, Paola Suarez, Christopher Kaiser, and Vitor Melo estimate that self-employment in California fell by 10.5% on average, while overall employment fell by 4.4% on average, comparing California’s rates before and after the implementation of AB5 to other states with less stringent worker classification rules.

“Our findings suggest that AB5 did not merely induce employers to hire former independent contractors as traditional employees and that the reduction in self employment was not accompanied by an equal increase in traditional employment,” the researchers said. “Thus, AB5 may have reduced overall employment and labor force participation.”

Workers considered employees are protected by various federal statutes, like those requiring minimum wage and overtime pay, and generally incur higher costs for employers compared to contractors. The authors said the trend they identified could have been caused by businesses that rely on only independent contractors shutting down, employers no longer working with contractors, or contractors declining offers of full employment, but noted that because of a lack of available data they couldn’t “identify the relative importance of these mechanisms.”

Nevertheless, the data may provide some insight on how stricter worker classification tests may alter businesses’ and workers’ economic decisions and impact the labor market as a whole. California’s ABC test presumes a worker is an employee unless they meet three factors outlined in the test.

But, some economists say the paper may not be informative.

Michael Reich, a professor at the University of California Berkeley and chair of it’s Center on Wage and Employment Dynamics, noted when comparing other states to California, the analysis doesn’t take into account whether the economic trends in those states were similar to California’s prior to the policy changes on worker classification.

Reich said that makes it difficult to tell if the results were caused by strict worker classification policies or other factors, citing other studies that indicate that independent contractor arrangements are actually trending upward.

“If you don’t have parallel pre-trends you’re now comparing apples and oranges,” he said.

The high number of job losses for full employees indicated by the study also calls into question the validity of the findings, said Heidi Shierholz, president of the Economic Policy Institute.

“The story that AB5 would cause job loss would be something like, some folks move from self employment to employee-based employment,” she said. “That would make traditional employment go up, or at least not fall. There’s just really no story where traditional employment would fall” as a result of that shift, she said.

The new research lands as business groups raise concerns about the US Department of Labor adopting a test similar to California’s ABC test in its latest rulemaking on worker classification.

But while the DOL stated “there may be conceptual overlap” between one of the factors in its test and one of the prongs of the ABC test, the agency also asserted it’s not adopting an ABC test in its final independent contractor rule released earlier this month.

The DOL said that “while a worker can perform work that is integral to the potential employer’s business and still be considered an independent contractor under this final rule, a worker performing work in the usual course of their potential employer’s business will always be an employee under the ABC test.”

READ MORE:

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• Workers Divide On Contractor Status, Complicating Biden Approach
• Worker Status Rule Garners Trucking, Builder Ire More Than Uber

Truckers stage a protest against California’s AB5 labor law as they shut down operations at SSA Terminals in Oakland on July 22, 2022.

Photo by Anibal Martel/Anadolu Agency via Getty Images

Ian Kullgren: There are two more weeks until Groundhog Day, but for labor watchers the more important date on the calendar comes Tuesday at 10 a.m. EST, when the Bureau of Labor Statistics releases its annual data on US union membership. Here are a few things to watch for:

Will unions see their shadow? In other words, will they turn their 2023 strike victories into new members? Last year was a fail—the unionized share of the workforce dropped to a record low of 10.1% in 2022 even as unions added 273,000 members. Labor leaders can’t afford to cede much more ground if they hope to reverse this decline.

But there may be some glimmers of hope. NLRB data show that unions organized 58,000 workers in the first half of 2023, with an 80% success rate at election time, one of the higher rates in years. It remains to be seen if that trend kept up in the second half of 2023.

Is the cash paying off? It’s been almost two years since AFL-CIO President Liz Shuler pledged to organize 1 million new workers—about 7% of the total union membership population in 2021—through a new initiative called the Center for Transformational Organizing. The labor federation hiked dues in 2022 to raise an extra $10 million a year for new organizing; 2023 was the first full year it was in effect.

The BLS data should give some idea whether these efforts are paying off. Even just a small uptick in private-sector union density would be considered a win.

If not, Shuler, who’s nearly half way through her first four-year term, might have some explaining to do.

Which sectors? For years, there’s been a huge chasm between public and private-sector workers, with just 6% of the latter category belonging to unions. Organized labor must start making gains in the private sector if it hopes to turn the tide anytime soon, and the Hollywood strikes last summer, along with a nascent organizing movement in the video game industry, could help them reach new workers.

READ MORE: ANALYSIS: Unions, on a Roll, Are Reeling in the Workers

We’re punching out. Daily Labor Report subscribers, please check in for updates during the week, and feel free to reach out to us.