How the government vastly underreports its labor statistics

In July, according to the U.S. Census Bureau, more than 425,000 new business applications were filed. Just to give you an idea how huge that is, there were approximately 292,000 and 283,000 new business applications filed in July 2018 and 2019. Then things really got going. In July 2020 and July 2021, there were 553,000 and 445,000 new business applications filed. All in all, there were approximately 10 million new startup applications cumulatively filed in 2020 and 2021 — about 5 million each year, and 2022 is on a similar track. Usually, the number is about 2.5 million to 3.5 million per year.

Here’s another fact. Using July’s numbers, the Census Bureau is projecting that, of the 425,000 new business applications filed, about 31,000 will actually employ people (have payroll tax liabilities) within the next year.

Which begs the question: What about the other 394,000 who filed applications? Of course, some of them won’t amount to much. But the great majority of them will likely be around for a while. That’s because they represent an exploding (and underreported) part of the U.S. economy: the freelancer. The independent contractor. The gig worker. The side hustler.

These are Uber drivers and Grubhub deliverers. They’re tech startups and Amazon merchants. But they’re also service providers, contract workers and independent “professionals” now doing the work on their own that they were formerly doing for an employer. And if you can believe all the research about these people, then you’ll learn that 42 percent of small businesses employ freelancers and that 43 percent of the working U.S. population will turn to some type of freelance work over the next few years.

These are the new workers. They don’t meet the definitions of the employee that the government has been using since it started calculating unemployment in 1936. But there was no Uber in 1936. There were no “gig” workers, at least as we currently think of them. The 1099 form didn’t exist then. And yet the calculation remains the same.

According to the Bureau of Labor Statistics (BLS), there were more than 11 million job openings last month, a 57 percent increase since February 2020. How is that possible? Why are businesses suddenly looking for so many more people?

A significant piece of that puzzle has to do with the gig economy. Many small business owners have unfilled positions and, if asked, would say they’re “actively recruiting” (which is one of the parameters used by the Bureau of Labor Statistics when estimating open jobs). But they’ve also lost workers to the gig economy.

Except they really didn’t “lose” those workers. Many of my clients have hired those (and other) workers back as independent contractors to perform specific tasks. For a small business owner, that’s a great solution. As long as they abide by the rules (which will soon be changing), they no longer have to incur payroll taxes, benefits and other responsibilities inherent in an employer-employee relationship. They’ve converted their former workers to outside vendors and can treat them accordingly.

And the former workers? They’re now entrepreneurs themselves, free to work whenever and wherever and for whomever they want. They can negotiate their own rates and set their own hours. Sure, they’ve lost the certainty of a job and have to deal with the headaches that business owners have, like paying for health insurance and collecting invoices. But that’s the life. Some may understandably not like this life and return to their jobs. Others may grow and hire employees of their own. Most, I bet, will continue on juggling a few “clients” and performing the work they were doing as an employee but with more variety and potentially more income. They’ll probably never go back to being employees.

So where do these “workers” fit into the employment picture? They don’t. The BLS ignores them.

Will the government ever take these fundamental changes in the nation’s workforce into consideration when calculating unemployment in the future? Can a new unemployment rate or a revised job openings estimate be created that includes the tens of millions of freelancers who are performing the work of former employees?

Until that happens, we’ll never get a true reflection of our labor market.

Gene Marks is founder of The Marks Group, a small-business consulting firm. He frequently appears on CNBC, Fox Business and MSNBC.