The Role of Independent Contractors in the U.S. Economy

Abstract

More than 10 million workers, comprising 7.4 percent of the U.S. workforce, are classified by the Bureau of Labor Statistics as independent contractors, and another 4 million work in alternative work arrangements in which they may be legally classified as independent contractors for one or more purposes. Alternative workers in 2010 will account for approximately $626 billion in personal income, or about one in every eight dollars earned in the U.S. Independent contractor arrangements are commonplace throughout the U.S. economy, from computer software engineers and emergency room physicians to home health care providers and timber harvesters. Such arrangements generate substantial economic and other benefits for both workers and employers, allowing both firms and households to use labor services in situations where a traditional employment relationship is either impractical or uneconomic for the worker, the client, or both. The economic benefits of independent contracting include workforce flexibility, avoidance of fixed costs, the ability to “pay for performance,” the avoidance of legal and economic barriers in efficient contracting, and, perhaps most important, the satisfaction of workers’ desires to “be their own boss” and benefit from the independence associated with independent contractor relationships. Another important reason workers prefer independent contracting is that it serves as a stepping stone to entrepreneurship and small-business formation. Policy changes that curtail independent contracting, such as the proposed repeal of the Section 530 “safe harbor” for classification of workers for tax purposes (which would increase regulatory risk for independent contractors and their clients alike), would result in higher unemployment, slower economic growth and reduced economic welfare. Specifically, curtailing independent contracting would: reduce job creation and small business formation; reduce competition and increase prices; create sector specific disruptions; and produce a less flexible and dynamic work force.