Should your boss tell you how to vote? To even ask the question is absurd today, but it was not always so. Prior to the Industrial Revolution, workers were long looked down upon in both law and society. Early English attempts at republican democracy explicitly excluded employees from being able to vote, because employees were deemed to be servants to their masters, and were presumed to do his bidding in all matters, including voting. Things have improved immeasurably for working people since then, but the master/servant framework of labor relations is still with us today, in the form of obsolete labor and employment laws and regulations.
Common Law Definition of Employment
What is the difference between an employee and an independent contractor? Both do work for pay; I do a job, and you pay me for it. It’s not complicated—until government gets involved. Formal employees require paperwork, legal and regulatory compliance, and other red tape. Independent contractors have their own thickets to work through, though, and more may be on the way. The technical definition of “employee” is far more complicated than it should be. This makes it more difficult for people to find jobs than it should be.
The Corporation and the Coaseian/Hayekian Framework
Why do corporations exist in the first place? Why don’t all business transactions simply go from one individual to another? On the other end of the spectrum, why isn’t society organized as one giant firm? Why is the real world somewhere in the between? The answer is transaction costs.
It is easier to write a check or settle legal disputes with a single entity like McDonald’s or Walmart than it is to write separate checks and make individual legal deals with each of their hundreds of thousands of employees.
But when a corporation becomes too big and bureaucratic, their own internal transaction costs can become more trouble than they’re worth. Time spent on paperwork between departments means time not spent on innovation or customer service; corporatization has opportunity costs as well as transaction costs.
Transaction costs and opportunity costs put a natural limit on the size of corporations, even when it can’t be put into dollar terms. Employment contracts are an attempt to reduce transaction and opportunity costs, and governments should not get in their way.
The Heyday of the Corporation and Regulatory Responses
Many attempts to improve working conditions and worker pay actually increase transaction and opportunity costs. They backfire, in other words. Collective bargaining, as spelled out in the National Labor Relations Act (NLRA) and the Fair Labor Standards Act (FLSA), can increase transaction costs so much that many affected companies hire fewer workers. Those laws keep people out of work. The Taft-Hartley Act, which allows states to enact right-to-work laws, helps to reduce the transaction costs of hiring employees, but only in the states that take advantage of it.
Corporate and Worker Responses to the Regulated Firm
Surprise! Companies react to incentives. When hiring formal employees becomes too expensive and bureaucratic, companies will turn to other avenues. One avenue is outsourcing: instead of having support and custodial staff on direct payroll, a company will hire outside firms to do the same jobs, and avoid payroll taxes, pensions, and other expenses. Another avenue is avoiding expensive union wages, at least among businesses that are mobile enough to move away from union-mandatory jurisdictions. This is a major reason why nearly a third of government employees are unionized—governments cannot move away—while less than seven percent of private sector employees are union members.
Franchising is another way to avoid regulations. Many regulations target large companies, and exempt smaller ones. If a large company farms out locations to small individual franchisees nationwide, it can keep its regulatory costs lower. In a way, franchises are an artificial regulatory creation, but some regulators want to do away with the franchise model altogether. This would hurt franchisees, as well as consumers.
The Return of Regulation
The Labor Department’s David Weil argues that people like you and me should not be able to negotiate our own labor contracts. We need smart people such as, well, him. From the top down, he seeks to “change private behavior,” and institute a single set of planned principles, set by government. This achievement would be as impressive as it is unrealistic.
People, on their own initiative, have instead been working from the bottom up. “Sharing economy” firms such as Uber, Lyft, Taskrabbit, and others have been attracting willing workers in droves, even though few of the workers are formal employees. A major reason is that their arrangements have low transaction costs. Willing workers should be allowed to work, even if they don’t match David Weil’s preferred high-transaction cost methods.
The Sharing Economy and its Regulatory Challenges
A major reason for regulation is a lack of trust. The sharing economy makes regulators obsolete, through built-in rating systems for both buyers and sellers. Uber customers can rate their drivers, and drivers can rate their riders, too. Besides letting anyone know at a glance who is trustworthy and who is not, this system gives everyone an incentive to not be a jerk—something that escapes the legacy regulatory system.
Legally speaking, though, who counts as a formal employee, and who counts as a contractor? This is an artificial distinction, and different countries define the same terms very differently. We argue for workplace choice—let adults be adults, and let workers and employers decide on their own terms about salaries, benefits, hours, vacation policies, and so on.
One part of the traditional regulatory definition of “employee” is benefits—health insurance and other perks, paid for by the employer. This World War II-era model badly needs an update. Different people have different needs, and they should not be held captive by a single health, dental, or retirement plan. As historian David Beito notes, this model can unfairly tie workers to jobs they do not like, and for no good reason. Workers deserve better.
One part of workplace choice is giving employees and contractors a say in their health insurance plans, retirement plans, and other benefits. One of the least fair parts of current employment law is that if an employee quits or is laid off, she loses her insurance and other benefits. Employees and contractors should be able to choose their own benefits, and carry them along from job to job. Let the market find ways to fix this problem.
As posted to Foundation for Economic Education.