How an obscure labor rule could make recession inevitable

This week the Federal Reserve announced that it expects a recession in the coming months. Companies are already engaging in hiring freezes and layoffs, and several economic indicators point to a pessimistic future. But a pending Department of Labor (DOL) rule could make this recession more severe by cutting off work opportunities for millions of Americans.

Under the guise of combatting worker misclassification issues and perceived worker inequalities, the DOL is finalizing a new independent contractor rule that would significantly limit the circumstances under which a worker can legally engage in self-employment.

At this point, most people realize that freelancing, independent and self-employed work are a crucial feature of the American labor force — extending beyond the so-called gig economy and into sectors like health care, professional services, technology and even farming. Today, one out of every three Americans chooses these forms of work, either as a primary or secondary source of income.

While independent work does not automatically come with the benefits and stability of traditional employment, it provides additional, and sometimes critical, opportunities for people to make money during uncertain times. This should come as no surprise; most of us have neighbors, friends or family who already rely on this type of income. Importantly, though, a large body of academic research affirms this.

In fact, several studies have shown that individuals turn to independent work temporarily after job loss. In a 2017 paper published in the American Economic Review, the economists report that workers who suffered a spell of unemployment are significantly more likely to turn to independent work opportunities for a source of income.

This is consistent with a recent a study that uses IRS tax data to understand the income trends of both conventional freelancers and gig workers. It turns out that people turn to both types of independent work opportunities after they have faced a loss of income or unemployment.

And what’s more, when analyzing the private financial data of these workers, a study found that workers who lost a job saw their incomes and liquid assets partially recover three months after they began working in freelancing or gig jobs.

All of this points to a fact that policymakers should already be acknowledging: Independent work opportunities are critical for financially strained workers when they face hardship.  

Taken together, the various research studies should place our attention to the potentially harmful impact of restrictions on independent work for vulnerable individuals who have recently faced unemployment or income losses. The DOL rule (part of a recent wave of similar federal and state intrusions) could eliminate work opportunities for these individuals and thereby worsen their economic standing.

And in fact, this is what happened when in 2019 California passed Assembly Bill 5 (AB5), a similarly restrictive rule for independent workers that resulted in significant job losses across the state. Reports described job losses for the creative community of freelancers, such as professional choral artists, classical performers and singers, dancers, actors and musicians. Several other reports showed job losses for translators and interpreters, court transcript editors, writers and truck drivers. Due to a bipartisan backlash highlighting the job losses, California later exempted these professions, and many others, from AB5.

Like California’s AB5, the DOL rule would result in job losses because it is impossible to extend all independent work opportunities into employment opportunities, thereby leaving the workforce with fewer jobs altogether. Beyond that, the DOL rule introduces so much complexity and confusion into the picture that it would deter organizations –especially small businesses, which don’t always come equipped with lawyers and compliance resources – from working with independent workers altogether.

At a time when employment opportunities are likely to become scarcer, it’s unwise to also limit independent work opportunities. Eliminating independent work will mean that workers will be unemployed for longer periods, thereby risking a far more severe recession. Instead of reducing jobs, policymakers and regulators should be looking for ways to allow everyone, traditional employees and the self-employed alike, to pursue work opportunities that improve our economic standing.

Liya Palagashvili is a senior research fellow with the Mercatus Center at George Mason University and author of the study “Analyzing the Department of Labor’s Rule on Restricting Independent Contractors.”