Unfazed by President Trump’s non-stop belligerence in last Tuesday’s debate, Democratic presidential nominee Joe Biden embarked the next morning on a whistle stop tour of Ohio and Pennsylvania — two pivotal states Trump won in 2016 that now seem to be slipping from his grasp.
In addition to their huge importance as presidential battleground states, Pennsylvania and Ohio rank among the top five U.S. states in natural gas production. No wonder Trump keeps trying to convince voters there that the former vice president is a Green New Deal zealot eager to ban drilling for natural gas.
Only it’s not true, and it’s not working. According to a new ALG Research Poll commissioned by the Progressive Policy Institute (PPI), Biden is leading Trump in Pennsylvania (50-44) and Ohio (48-46). What’s more, Biden is running significantly ahead of Hillary Clinton’s 2016 performance in the “shale belt” — the gas-producing counties of Southeastern Ohio and Western Pennsylvania that Trump won handily last time.
Following last night’s debate, Joe Biden will campaign in Pennsylvania and Ohio, where a new poll released today by the Progressive Policy Institute (PPI) shows him leading President Trump. In addition to their huge importance as presidential battleground states, Pennsylvania and Ohio are energy powerhouses that rank among the top five U.S. states in natural gas production.
The poll, commissioned by PPI and conducted by ALG Research, finds Biden ahead by six points in Pennsylvania (50%-44%) and two points in Ohio (48%-46%), despite Trump’s attempts to brand Biden falsely as an opponent of “fracking” and natural gas. Biden also is running ahead of Hillary Clinton’s 2016 performance in the “shale belt” — the gas-producing counties of Southeastern Ohio and Western Pennsylvania.
“Unlike the ‘drill, baby drill’ right and the ‘keep it in the ground” left, voters in midwest states like Pennsylvania and Ohio show a deeply pragmatic streak on energy and climate issues,” said PPI President Will Marshall. “They are not climate deniers like Donald Trump, and they view natural gas as a bridge, not a barrier, to America’s clean energy transition.”
Key poll findings:
71% of Pennsylvania and Ohio voters — and 66% in gas-producing counties — say climate change is a “real and very serious problem.”
Voters oppose a ban on natural gas by an enormous margin — 53 points (74-21%).
Even among liberal leaning groups, there is little appetite for a ban: Democrats, young voters and advanced degree holders oppose a ban by 30, 29 and 55 points respectively.
Voters’ biggest worry about banning gas production is job loss, following by higher energy prices.
Voters do not want to use fossil fuels indefinitely, but they see natural gas as playing an important role in supporting U.S. renewable energy growth over the medium term.
Voters expect it will take a decade or more to end use of natural gas without disruptions to the economy, electric reliability, and energy bills.
Despite Biden’s lead in this poll, voters split over who they trust more on energy issues.
“Voters know where Trump stands on energy, but they aren’t as certain about Biden,” said Marshall. But when it’s described to them, 52% of voters say they support a Biden plan that does not ban fracking, continues to use natural gas and requires the United States to achieve zero carbon emissions by 2050.
Media contact: Carter Christensen, cchristensen@ppionline.org
Appendix B: State Breakdowns on Key Findings:
o Pennsylvania: Voters oppose a natural gas extraction ban by 72-23%.o Ohio: Voters oppose a natural gas extraction ban by 76-19%.
o Pennsylvania: Democrats oppose a ban on natural gas extraction by 59%-32%.o Ohio: Democrats oppose a fracking ban by 65-30%.
o Pennsylvania: The biggest worry associated with banning natural gas is job loss (40%), followed by increased energy prices (20%) and energy shortages (15%).
o Ohio: The biggest worry associated with banning natural gas is job loss (26%), followed by increased energy prices (18%) and energy shortages (15%).
o Pennsylvania: 57% of voters see natural gas as playing an important role in supporting U.S. renewable energy growth over the medium-term.
o Ohio: 53% of voters adhere to this view.
o Pennsylvania: 43% of voters say we should be using more natural gas; 34% say we should be using the same amount of natural gas versus; and, 18% say we should use less natural gas.
o Ohio: 41% of voters say we should be using more natural gas; 37% say we should be using the same amount of natural gas; and, 18% say we should use less natural gas.
The Covid-19 crisis has put a spotlight on how archaic government systems are failing to keep up with the times and handle an unexpected surge of applications for public assistance programs. Cybersecurity threats have demonstrated vulnerability in aging government IT systems. New missions and requirements for government technology capability have shown the limitations of 20th century technology systems and resources for addressing 21st century needs.
The scale of the problem is massive. According to our estimates, federal, state and local governments would have needed to spend an accumulated $316 billion more over the past 20 years to have kept up with the growth of software investment per worker in the private sector. This should be viewed as a lower bound on the shortfall in government IT investment, as this figure excludes hardware investments that also should have been made.
Washington needs to build incentives inside government for a technology culture of continuous improvement and innovation to keep up with external technology developments and changes. Absent such a major modernization strategy, government will become less and less functional in our everyday lives. We need a big push to modernize government, using new digital tools not only to deliver services more efficiently, but to reengineer public services to make them more citizen-friendly and empowering.
To meet public expectations for the kind of speed, versatility, accuracy and efficiency that Americans experience in the non-governmental aspects of modern daily life, we must once again reinvent government just as we did 25 years ago at the beginning of the internet age.
Congress has tried to provide critical relief to Americans during the Covid-19 pandemic — passing three phases of disaster relief totaling 13.6 percent of GDP — but the rollout of support has been marred by obsolete IT and bureaucratic culture.1 In June, the House Ways and Means Committee estimated between 30 to 35 million stimulus checks had yet to be issued.2
The initial rounds of the Paycheck Protection Program (PPP) also were plagued by institutional delays, internal IT system crashes and incomplete, inaccurate and lagging databases. An April 2020 survey by the National Federation of Independent Business found that 28 percent of small business owners were unsuccessful in submitting an application for funds.3 The Small Business Administration’s loan processing system, known as E-Tran, crashed twice in April, frustrating lenders and small business owners seeking relief.45
State governments have also stumbled. For example, unemployment offices have been stretched thin as roughly 58 million Americans have filed claims since March.6 In Washington State, only 41 percent of claims had been paid as of July 30.7 Florida’s unemployment website has crashed repeatedly, with phone calls to the office going unanswered8, and citizens complaining of lengthy delays. Frustrated workers in Oklahoma and Kentucky have camped out overnight in front of unemployment offices for answers.9
Government IT Woes Predate COVID
The COVID-19 crisis is just the latest example of a chronic issue plaguing government programs at the state and federal levels. Poor information technology infrastructure and practices, antiquated and siloed systems, and outdated databases, have led to three main issues: security vulnerabilities, poor user experience and lengthy delays for citizens interacting with their government.
On the question of data security, perhaps the most infamous case is the data breach of the U.S. Office of Personnel and Management (OPM) in 2015 by hackers working for the Chinese military.10 The incident affected 22.1 million Americans and included data on security clearance files, Social Security numbers (SSNs), job assignments, performance evaluations, fingerprints, and financial and health records.
Most disturbingly, data missing from the OPM database could potentially be used by foreign spy services to uncover CIA operatives working under diplomatic cover, as Ellen Nakashima reported for TheWashington Post: “Names that appear on rosters of U.S. embassies but are missing from the OPM records might, through a process of elimination, reveal the identities of CIA operatives serving under diplomatic cover.”11
But while the OPM hack may have attracted the most attention in recent years, it wasn’t even the largest hack of U.S. government data in terms of the number of people affected. As shown in the table below, data breaches of the U.S. Voter Database, the National Archives and Records Administration (NARA), and the U.S. Postal Service (USPS) each affected more than 50 million Americans.
Table 1: Largest Government Data Breaches
Source: Government Accountability Office
15 In addition to data breaches, government databases are often inaccurate and out of date, leading to ineffective performance. For example, the IRS taxpayer database contains incomplete and aging data, which resulted in improper payments in PPP benefits to large numbers of dead taxpayers, returned payments that were misdirected, and even funds sent abroad to foreign citizens of other countries. 1213
Currently, the U.S. government spends the vast majority of its IT budget on maintaining and operating older legacy systems rather than upgrading and modernizing them. A 2019 Government Accountability Office report found that 80 percent of the $90 billion the federal government planned to spend on IT in 2019 would be used to operate and maintain existing systems.14 As shown in the table below, the report concludes that there are 10 legacy systems most in need of modernization, a few of which are more than 45 years old. One system at the Department of Education still runs on Common Business Oriented Language (COBOL), a programming language first introduced in 1959.
COBOL was originally designed for mainframe computers. While it has mostly died out in the private sector as businesses have transitioned from owning on-premise mainframe computers to renting cloud computing services from Amazon, Microsoft, or Google, COBOL has been in the news recently as government relief programs struggle to cope with surging demand.16
Government systems still rely on this outdated technology for essential services. At the state level, COBOL has been used to keep unemployment insurance programs running continuously for 40 years (34 state unemployment systems still depend on it today).1718 And during the current crisis, New Jersey’s governor put out a call for volunteers fluent in COBOL to help fix the state’s computer systems.19 Data from Indeed, a job listings search engine, showed a massive increase in search interest for “COBOL” in April.20 But there is a real risk these calls for help will go unanswered. COBOL is only the 43rd most popular programming language as of this year and the average age of a COBOL programmer is about 55-years-old.2122
Why haven’t millions of people received their economic impact payments from the IRS yet? COBOL seems to be the culprit there, too. Many Americans encountered error messages (“Payment Status Not Available”) when they tried to find out why they hadn’t received their stimulus check yet.23 The solution? Using only uppercase letters in the form (and if that didn’t solve the issue, people were advised to try abbreviating words like “Street” and “Avenue”).
But the problems are not just limited to outdated programming languages. The IRS has a profoundly outdated and inaccurate taxpayer database and its systems are unable to talk to each other. John Koskinen, the Commissioner of the IRS from 2013 to 2017, testified on multiple occasions in Congress, and made other public statements, about the dangerously outmoded condition of the agency’s IT infrastructure, even citing existing systems that date back to the Kennedy Administration.24
Other government processes are also antiquated. In New York, newly unemployed workers are required to fax in documentation.25 In some states, people can file for unemployment online, but only from a desktop or laptop computer.26 The state websites, it turns out, aren’t mobile-friendly — a significant barrier for the millions of people whose only internet access is via their smartphones.27 And some states, such as Illinois, even shut down their websites for multiple hours every day.28
A Decades-Long Investment Shortfall
These problems with the government’s digital infrastructure didn’t arise overnight. Technical failures of this nature are the inevitable result of an accumulating investment deficit over recent decades. According to a Progressive Policy Institute analysis of Bureau of Economic Analysis data, federal and state government investment in software per worker significantly lags behind private sector investment.2930
As the pandemic recession grinds on, the federal and state governments must invest more in digitizing their operations if they are going to deliver aid faster and more accurately. U.S. officials should study the example of Estonia, which has digitized 99 percent of government services, including online voting, an e-residency platform that allows businesses across the European Union to establish and manage a business online, and a nationwide system of digitally-kept health records.31323334 Estonian officials estimate that digitizing these processes saves the country two percent of its Gross Domestic Product a year in salaries and expenses, roughly what it pays to meet its military obligations to NATO.35
The federal government has a Technology Modernization Fund, but it’s only been allocated $125 million since 2017 when it was created.3637 In its big relief bills (such as the Paycheck Protection Program and the CARES Act), Congress included funds for agencies to upgrade their technology systems. For example, the bills allocated nearly $3 billion to the Small Business Administration that could be used to upgrade and modernize its IT systems. But much of the money has gone to hire outside contractors rather than to acquire new technology. For instance, the Small Business Administration awarded RER Solutions $500 million for data analysis and loan recommendations as part of Covid-19 relief.38 Sufficient in-house technology systems would both limit the potential for breaches to occur and be a more prudent use of taxpayer money rather than continuously “renting” delivery systems.
For too long, the U.S. public sector has been a laggard in adopting the modern digital technologies that the rest of society have. That’s mainly been the result of underinvestment. To close this public-private technology gap, the federal and state governments need to invest more in software and systems improvements to ensure aid is rapidly delivered during the next crisis.
Government IT Needs Both Incremental Modernization and End-to-End Modernization
All of these issues might make it seem like the best approach is to tear everything out root-and-branch and start over. And while end-to-end modernization strategies might make sense in some cases, for the most essential government systems, an incremental strategy is actually best because it minimizes risks to essential services and limits downtime for users. As Alasdair Allan, a computer scientist at the Raspberry Pi Foundation, pointed out, legacy software systems have accumulated decades of solutions to corner cases and bug fixes. Starting from scratch would be a mistake:39
You should (almost) never rewrite from scratch, and (almost) never throw the legacy system away, it is your institutional knowledge. A legacy software system is years of undocumented corner cases, bug fixes, codified procedures, all wrapped inside software.
If you start from scratch you will miss things. There is no guarantee that you will end up in a better situation, just a different one. I have yet to speak to anyone that has been involved with a project to reimplement a large legacy code base from scratch that has anything good to say about the idea. Document, improve the build system, modernise the infrastructure around it. Write tests. But do not throw it away.
Modern programming languages can be used to deliver social services on modern devices (e.g., smartphones) while sitting on top of the existing mainframe servers. This approach would drastically improve the user experience while preserving the accumulated knowledge. But what might this look like in practice and where should the government start?
Start Small: Public-Private Partnerships and Pilot Projects
One area the federal government can look to improve incrementally in terms of delivery via information technology is anti-poverty programs. Low-income families spend inordinate amounts of time and energy running from one social service agency to the next to apply for public assistance. Now, with many offices shut down, social distancing, and intermittent mass transit, that job is harder than ever. The opportunity costs of simply applying for and receiving public support have risen dramatically. We need to use new digital tools to reduce those costs by empowering low income people to apply once online and receive benefits on an ongoing basis.
Over time, government IT systems have accrued a lot of technical debt — the cost of future work caused by choosing an easy, short-term fix.40 Solving these problems won’t be easy. But a step in the right direction would be passing the Health, Opportunity, and Personal Empowerment (HOPE) Act.41
As Joel Berg detailed in a white paper for PPI in 2016, the HOPE Act would jumpstart the modernization of social services with pilot projects and innovation contracts.42
“Currently, low-income families need to navigate a morass of bureaucracy to receive the benefits they need and deserve, including SNAP, WIC, and UI benefits. Filling out the requisite forms often requires waiting in long lines and traveling to far flung offices. For example, for residents of Panola, Alabama, the closest location to get a driver’s license is a 70-minute drive away.For more complicated processes, recipients often need to hire professionals to help them secure financial assistance from the government.
A 2016 PPI study found that low-income workers paid an average of about $400 each to national tax preparation storefront chains in low income neighborhoods.43 A better alternative would be to move all these services online and make them accessible from a single smartphone app.”
Nevertheless, the government — at both the federal and state and local levels — does not have a good track record of building large scale transactional systems. Moreover, poor customer experiences have too often resulted from government attempts to mimic the online transactional processes and consumer interfaces the public has come to expect from their daily experiences with private sector innovations. And as we’ve shown, the government has a big task ahead in fixing its current systems, in terms of financial resources, managerial resources, and tech talent resources.
However, the needs of the country also cannot wait for notoriously lengthy public procurement cycles to solve these problems. Just getting through the phases of systems design, specifications, and competitive procurement for major systems would take 5-10 years, while implementation of awarded contacts would take 5-10 years more, with high risk of obsolescence by the time of deployment. Successful government reinvention will therefore require reinvention of processes and strategies for service delivery in order to rapidly meet public expectations for performance. Innovative public-private partnerships, with appropriate public safeguards, should be a cornerstone methodology for government reinvention in the 21st century.
With all of that in mind, new online service delivery platforms could be provided via multi-sourced public-private partnerships – including those at no cost to either the public treasury or individual users — which would allow the government to harness the private sector’s technology capabilities and IT infrastructure, with a declared objective of creating an environment of continuous innovation and improvement. The government could then create supporting national public communications campaigns, down to the community level, to inform the public about the availability of these service platforms, so the working poor can know there is are free online, government-sponsored and regulated alternatives available to them.
According to Berg, the HOPE Act can help make this better alternative a reality:44
“Here’s how HOPE would work: The President and Congress would need to work together to enact a law that would authorize the federal Departments of Health and Human Services (HHS), Housing and Urban Development, (HUD), Treasury, and Agriculture (USDA) to work together – and to form public/private partnerships with banks, credit unions, and technology companies – to create HOPE accounts and action plans that combine improved technology, streamlined case management, and coordinated access to multiple federal, state, city, and nonprofit programs that already exist. States and localities would initially be asked to participate in pilot projects implementing the accounts and plans, and, if they work, would be required over time to implement them universally.”
The program would only cost $35 million in its initial stages and would go a long way to showing the potential benefits of bringing government tech into the 21st century. As Berg says, “In America, trying to get out of poverty can be a full-time job.”45 In normal times, this is a tragedy. In a pandemic, when tens of millions are at risk of becoming impoverished for the first time in their lives, this is a national emergency.
The HOPE Act can serve as the first step in a radically pragmatic approach to modernizing government IT. Senator Kirsten Gillibrand and Representative Joe Morelle have been leading the effort to include this bill in the Phase 4 relief package for the COVID crisis and low-income Americans need this change now more than ever.46
A big part of the problem is that government investment in software has not kept pace with the private sector. As Figure 1 shows, real private sector investment in software per full-time equivalent (FTE) worker increased at an annual growth rate of 6.4 percent over the last 20 years. Meanwhile real investment in software per FTE worker grew at a noticeably slower rate of 4.7 percent for federal nondefense, 4.1 percent for federal defense, and 4.1 percent for state and local governments.
If the federal nondefense sector had kept pace with the private sector, software investment in 2019 would be 38 percent, or $10.7 billion higher (Table 2). Software investment in the federal defense sector would be 55 percent higher, and state and local government software investment would be 54 percent higher.
Table 2: The 2019 Software Gap (billions)
Actual software investment
Necessary software investment*
Size of the gap
Federal Nondefense
28.3
39.0
38%
Federal Defense
12.6
19.5
55%
State and Local
20.1
31.0
54%
*assuming that real software investment per FTE had kept up with private sector
Data: BEA, PPI
But that’s not the worst of it. This gap has accumulated over time, as year after year the government has spent less than it should have. According to our estimates, the accumulated shortfall in government software investment since 1999 has totaled $316 billion. As Table 3 shows, federal nondefense, federal defense and state and local governments would have invested an additional $123.6 billion, $89.5 billion, and $102.5 billion, respectively, to match the private sector’s pace over the last 20 years. This should be viewed as a lower bound on the shortfall in government IT investment, as this figure excludes hardware investments that will also need to be made.
Table 3: Accumulated Shortfall in Software Investment, 1999-2019 (Billions)
Federal Nondefense
$123.6
Federal Defense
$89.5
State and Local
$102.5
Total
$315.6
Source: Bureau of Economic Analysis data, author calculations
*See Methodology Appendix
While the task of modernizing government technological capabilities may seem immense, it pales in comparison to the opportunity cost of not acting at all. A Technology CEO Council report highlighting opportunities for innovation in government use of technology estimated the federal government alone could save $1.1 trillion over the next decade in areas like fraud and improper payments prevention, big data and analytics, mobile, and cybersecurity.47 For example, the federal government is forecast to make $117 billion in improper payments in FY 2020 and has made over $1 trillion in improper payments since FY 2012.48 Technology CEO Council estimates “the federal government could reduce improper payments by approximately $270 billion over 10 years” by employing techniques like when IBM implemented predictive analytics for New York State, which resulted in the prevention of $1.2 billion in improper tax refunds.49
Cybersecurity is another area where modern technology can save taxpayer money. A study by the Ponemon Institute found the United States to have the highest average cost for a data breach in 2020 at $8.64 million.50 Public-private partnerships can help federal, state and local governments avoid expensive cybersecurity attacks. IT security company Akamai helped the U.S. State Department move to a secure cloud-based web presence that successfully protected the agency from one of the largest Distributed Denial of Service (DDoS) attacks on U.S. government websites to date.51
Once again, public-private-partnership is an essential part of a 21st century cyber defense strategy. A good example is the Treasury/IRS Security Summit and ISAC, which was created by IRS Commissioner Koskinen five years ago, in concert with the private sector. This Treasury/IRS initiative has thus far reduced identity theft tax refund fraud by 80.52 This innovative strategy to defend the tax system against international cyber-attacks should be studied as a model for other government agencies who hold sensitive information and billions in public assets.
Conclusion
The Covid-19 pandemic has shed a light on the obsolete systems used by federal, state and local governments to deliver relief. When time was of the essence, the federal government stumbled in delivering stimulus checks and PPP loans efficiently and accurately. State governments were ill-equipped to process the unprecedented surge in unemployment applications. To be sure, government IT issues predate the pandemic, as federal and state systems have been routinely compromised by data breaches.
The root cause of these IT problems is a decades-long shortfall in government infrastructure investment. For example, the overwhelming share of the federal government’s investment in IT is spent on operating and maintaining outdated legacy systems, some of which are more than half a century old. But the solution isn’t to maintain obsolete systems that aren’t secure and don’t serve their purpose anymore; the solution is for governments to invest in modernization and digitization. Governments should start with pilot projects and partner with the private sector where possible. The HOPE Act would represent a down payment on the $316 billion we estimate federal, state and local governments has fallen behind the private sector. Likewise, modern public-private partnership strategies would enable government to leverage private sector investments and infrastructure to apply them to public purpose.
Methodology Appendix
Data from the Bureau of Economic Analysis enables us to calculate real software investment per full-time equivalent worker for the private sector, the federal nondefense sector, the federal defense sector, and the state and local sector. As shown in Figure 1, the growth rate was substantially faster in the private sector compared to the three government sectors.
We then calculated how much higher software investment in the three government sectors would have needed to be in each year since 1999 to match the growth rate of real software investment per FTE in the private sector. We then translated this increase into nominal dollars and summed over the twenty-year period to get the total shortfall. The 2019 figure gives the current gap reported in Table 2.
This estimate should be regarded as a rough measure of the amount of “software debt” that the government has built up. Ordinarily we might not worry about a lack of spending 10 or 15 years ago because of depreciation, but the government has spent far too much money holding legacy database systems together with scotch tape.
The other issue is hardware. The data published by the BEA for government spending on computers includes “consumption expenditures” as well as investment, so it doesn’t quite correspond with private sector investment in computers. It is generally agreed, however, that even in the era of cloud computing that the government needs to modernize its hardware.
In a new paper, the Progressive Policy Institute, working with the National Spectrum Consortium, projects that applications of 5G will create 309,000 manufacturing jobs in the United States over the next 15 years. That’s only a small part of the 4.6 million jobs that 5G is expected to create over that period, according to the paper, “The Third Wave: How 5G Will Drive Job Growth Over the Next Fifteen Years,” which I co-authored with Elliott Long.
The application of 5G to manufacturing is especially important because the new communications technology has the potential to jumpstart a lagging sector. Yes, it feels funny to call manufacturing a lagging sector, but that’s the only way to describe it. Even before the pandemic, labor productivity decreased in 18 of the 21 NAICS 3-digit manufacturing industries in 2019, according to a recent report from the Bureau of Labor Statistics. Output grew at a crawl.
The benefit of 5G is that it allows a much faster digitization of the physical transformation processes that lie at the heart of manufacturing. A 2019 McKinsey analysis observed that “[f]or decades, factory automation has relied on programmable logic controllers (PLCs) that were physically installed on (or very near) the machines they controlled, and then hard-wired into computer networks to ensure precise, reliable control under extreme conditions. If 5G consistently meets its performance promises, the PLC could be virtualized in the cloud, enabling machines to be controlled wirelessly in real time at a fraction of the current cost.” Not only will costs be lower, but flexibility will be improved.
5G, because of its low latency and high throughput, won’t just be an evolution in technology, but a revolution. It will open the door to incredible innovation in both the private sector and the government – including augmented and virtual reality, precision agriculture, smart ports, transportation and logistics, autonomous vehicles, connected construction and so much more.
In the United States, it is critically important to understand how this fundamental shift in technology will impact the broader economy, especially at a moment when COVID-19 has caused significant economic disruption and massive job losses nearing Great Depression levels. Key questions include:
How many jobs will be created by the 5G Economy? Will they be focused around traditional technology centers like San Francisco, New York, and Boston, or create new opportunities across the nation? What kinds of jobs will be created?
And for policymakers, what does the U.S. need to do to support efficient allocation of radio spectrum to support this technology development? And should we provide job training to ensure that workers in America can meet the opportunity?
Already the 5G job revolution has begun. Large mobile providers such as AT&T and Verizon are building out new networks across the country. Network companies such as Cisco, CommScope, Mavenir, and L3Harris are hiring 5G system architects, Radio Access Network (RAN) engineers, 5G solution architects, and technical managers in the 5G space.
Technicians and tower climbers are putting up 5G small cells at a rapid pace. This is not the first time that fundamental shifts in networking technologies have created sudden shifts in the economy and job opportunities.
This paper identifies and outlines three waves of wireless-driven job growth (Summary Table 1) in the U.S., and answers major questions about how many jobs will be created, which industries will be affected, where they will be located, and what we can do as a nation to accelerate efforts to meet this challenge.
Wave 1, The Rise of Wireless, covers the period from 1990-2007, as mobile carriers were building out the original wireless networks and cell phones went from a rarity to a necessity. Wave 1 generated roughly 200,000 jobs in the wireless industry.
Wave 2, “The App Economy,” covers the period from 2007 to 2019, which was rooted in the application of wireless to mobile apps via smartphones, rather than in the wireless industry.
Conventional BLS statistics contained no categories for app developers. But a widely cited study by this report’s author, released in early 2012, analyzed detailed data on job postings and estimated that the U.S. App Economy included 466,000 jobs, including workers developing and maintaining mobile apps and the workers supporting them. (1) Follow-up studies showed continued growth in the U.S. App Economy, with the latest figures from September 2019 reporting more than 2.2 million App Economy jobs. (2) This reflects an average growth rate of more than 20 percent annually. The main locus of Wave 2 job growth has been in industries such as entertainment, finance, communications and social networks, whose output can be easily delivered in a digital form (hence “digital industries”).
Wave 3, “The 5G Revolution,” began in 2019 as mobile carriers expanded their initial 5G networks. Wave 3 is generated by the applications of wireless to challenges in physical industries, such as agriculture, energy, construction, manufacturing, transportation, education, healthcare, and government including defense.
In recent years, most of these physical industries have experienced low or negative productivity growth, as well as low spending on telecommunications services.
5G is reversing both of these trends. Faster, more versatile wireless communications are an essential factor in driving productivity gains and creating jobs. Research shows that industries like manufacturing, construction, and healthcare have lagged in digitization, helping explain why productivity growth has been so slow. To increase productivity, physical industries need the ability to gather information from widely dispersed sensors and to use that data to control activities in real time. That’s not possible without faster and more versatile wireless commnications supplied by 5G. And the COVID-19 pandemic is accelerating the shift to many of these use cases.
How many jobs in the US will The 5G Revolution generate?
Unlike Wave 2, which mostly generated “cognitive” tech jobs which required a college education, Wave 3 is rooted in the physical world.
As a result, Wave 3 will also create mixed ‘cognitive-physical” skilled jobs, many of which fall into the category of installers and maintainers. So while App Economy jobs were focused on software development, Wave 3 jobs will drive job growth in dozens of sectors, across the economy in what we would traditionally consider both white collar and blue collar positions. Simply put, the third wave will benefit a wider set of Americans and regions than the second wave did.
For example, healthcare providers already monitor medical equipment like pacemakers remotely. But with 5G, the set of possible athome diagnostics or even interventions will expand greatly, and telehealth installers and maintainers will be a highly valued occupation. Similarly, precision agriculture will require “field sensor technicians,” autonomous vehicles will need a cadre of mechanics, and ecommerce will need people skilled in robotics maintenance.
Using the latest BLS projections as a baseline jumping off point, we estimate that 5G and related technologies will create 4.6 million jobs relative to the baseline in 2034, 15 years after the introduction of 5G in 2019 (which is also, not coincidentally, the peak of the most recent business cycle). These are higher paying jobs that will replace jobs that are lost in a wide range of industries and use cases (Summary Table 2).
In an important sense, 5G job creation is a countervailing force to job destruction from automation and globalization, and critically important in the post-COVID world.
During these tough economic times, we also need to be concerned about the short-term job impact and opportunities that 5G is creating as well. This paper also shows that current 5G build-out and engineering activities are creating 106,000 jobs as of April/May 2020. We estimate the location of these jobs by state. To get this estimate, we use a combination of data from real-time job postings and BLS figures.
What Do Policymakers Need to Do?
Finally, this paper identifies four areas where policymakers should focus to harness the full potential of 5G.
First, more spectrum – mmWave, sub-6, and unlicensed – will be needed for broadband and related applications. The U.S. would benefit greatly from a long-range spectrum plan. While the Trump Administration has directed the Department of Commerce to create a National Spectrum Strategy, it has not yet been released.
A long-range spectrum plan would ensure the resource is allocated wisely, provide certainty to 5G stakeholders, and encourage long-term investment in networks for 5G and beyond.
In addition to spectrum, the U.S. also needs a plan for the adoption of 5G across the government, both defense and civilian. The public sector should be a leader, not a follower.
Third, Congress should be willing to invest heavily in the development of 5G and successor technologies. That’s essential if the U.S. is to keep up with global competition.
And finally, the U.S. should make a significant investment in job training. The U.S. needs to double down on traditional STEM fields and encourage more people in America to go into engineering and math. Beyond that, we need a national skills initiative and mentoring programs to ensure that this new generation of workers will have the training needed to support the cognitive-physical jobs that the 5G Revolution is already beginning to create.
I. THE FIRST TWO WAVES OF WIRELESS JOB CREATION
Wireless technologies are generally divided into generations, each one corresponding to higher speed and increased capabilities. 5G is the current technology being rolled out, with 6G on the horizon, promising even faster speeds and satellite-terrestrial integration.
However, for the purposes of this paper we use a different taxonomy, based on the labor market impact of wireless technologies.
Wave 1: The Rise of Wireless
Commercial mobile radio telephony—what is sometimes called “0G”—was available as a niche service since the late 1940s. (3) It had very little economic impact. The first true commercial portable cellphone, the Motorola DynaTAC 8000X, was introduced in 1983, but there were only 5 million cellphone subscribers as of 1990.
But the use of cellular wireless technology rapidly gathered speed after 1990, giving rise to 109 million subscribers as of 2000 and 233 million subscribers as of 2006. Not surprisingly, the need to build out networks, and handle a soaring customer base generated a large number of jobs. The number of people working in the wireless industry went from 36,000 in 1990 to 200,000 in 2000. (4) Wireless employment remained at roughly that level until 2007 (Fig 1).
The first wave of wireless job growth encompasses 2G in the 1990s and 3G and 3G+ in the first half of the 2000s. With 2G data speeds measured in the kilobits, only low-bandwidth applications such as voice, text messages, and email were viable. Running other applications on top of a slow network was almost impossible.
Mobile internet became possible with 3G and 3G+, but it was still not fast enough to make a significant difference.
Wave 1, The Rise of Wireless, was not anticipated in any of the long-run employment projections issued by the BLS in the late 1980s and early 1990s. That’s important, because the BLS projections, issued regularly since the 1960s, are the most widely quoted comprehensive long-run occupational and industry forecasts available. The BLS also maintains the most detailed occupation industry matrix available for the United States.
Yet, the BLS projection methodology typically misses the impact of new technologies. For example, the employment projections issued in 1993 anticipated that telecommunications employment would drop from 912,000 in 1992 to 791,000 in 2000. (5) In reality, telecommunications jobs rose to 1,185,000 in 2000, 50 percent above the projected value (Table 1). (6)
Wave 2: The App Economy
The second wave of wireless jobs, The App Economy, began in 2007 with Apple’s introduction of the iPhone, coupled tightly with the opening of the App Store and Android Market (later renamed Google Play) in 2008. Suddenly mobile phone users had a powerful computer in their pockets that could handle a myriad of applications. The demand for mobile broadband soared. Mobile wireless networks moved from faster versions of 3G to 4G and LTE, as the number of broadband subscriptions soared.
But the second wave of wireless jobs also started with a paradox. Despite the central role of mobile, employment in the wireless industry peaked in 2007 and fell by half by 2019. In 2011, the Wall Street Journal ran a piece with the stark title: “Wireless Jobs Vanish.” (7)
In fact, wireless was creating jobs, but not in the wireless industry. (8) More and more IT professionals were involved in either developing mobile apps, maintaining them after they were on the market, or supporting them with users. For banks and other financial institutions, mobile apps became an important way of supplying their services without having expensive real estate or branch workers. Moreover, mobile apps could use the camera on smartphones to provide services like depositing checks at homes.
Beyond utilitarian tasks like banking, shopping, and travel reservations, apps became the major way that people interacted with their smartphones. We watched videos, listened to music or podcasts, messaged friends, played games, and spent time on social networks. One survey found that adult Americans spent almost three hours per day on their smartphones, and 90 percent of that time was spent on apps. (9)
Conventional BLS statistics contained no categories for app developers. But a widely cited study by this report’s author, released in early 2012, analyzed detailed data on job postings and estimated that the U.S. App Economy included 466,000 jobs, including workers developing and maintaining mobile apps and the workers supporting them. (10) Follow-up studies confirmed continued growth in the U.S. App Economy, with the figures from April 2019 reporting more than 2.2 million App Economy jobs. (11) This reflects an average growth rate of more than 20 percent annually (Table 2).
Other studies have found similar or even higher estimates. For example, a 2018 study from Deloitte estimated 5.7 million App Economy jobs in the U.S., using a different methodology and a much bigger assumption of spillover effects. (12)
The job impact of mobile broadband and the App Economy did show up in the official numbers in a different way: the unexpectedly rapid growth of people working in “computer and mathematical occupations.” “Computer and mathematical occupations” is a broad category that includes data scientists, software developers and engineers, information security specialists, computer support specialists, and database and network administrators.
By contrast, skilled workers who maintain the telecom networks—the people who lay and fix the fiber-optic lines and put up the cellphone towers—are in the “installation, maintenance, and repair” occupations.
The BLS projections in 2007 and 2009 underestimated the expected size of the computer and mathematical workforce in 2019 by roughly 20 percent, or over 1 million workers. But the relevant categories of skilled installers and maintainers were overestimated in the projections. This tilt towards tech jobs is very important for understanding the third wave (Table 3).
II. WAVE 3: THE 5G REVOLUTION
Wave 3 of wireless-driven job growth, The 5G Revolution, began in 2019 as mobile carriers expanded their initial 5G networks, and then continued into 2020. All major carriers in the U.S. — AT&T, Verizon, and T-Mobile — are heading towards nationwide 5G networks by the end of 2020, according to analysts. (13) The pandemic has made the case for 5G more compelling as many of the use cases for 5G services have been pulled into the present.
Telehealth has become not just optional but a requirement in many medical situations.
Students from kindergarten to graduate school have been forcibly introduced to distance learning. Businesses and governments have been learning how to use virtual meetings, at a much lower cost than flying around the world. Companies have started using robots to help disinfect their stores. (14)
The U.S. military faces its own challenges, as the virus has forced changes in routines to minimize infectiousness and to protect its suppliers. “We believe the COVID-19 pandemic has accelerated society’s transition to broadband and digitization by at least a decade,” said one market analyst in March 2020. (15)
Indeed, in the early days of the pandemic, Verizon announced that it was expecting to allocate $17.5- $18.5 billion on capital expenses in 2020, up from its previous guidance of $17-$18 billion. “This effort will accelerate Verizon’s transition to 5G and help support the economy during this period of disruption,” Verizon said in a press release. So far, the pandemic has caused spectrum auctions in Europe to be pushed back. (16) Meanwhile the FCC has not changed its spectrum auction plans for 2020. (17)
Spending on 5G networks is what is known by economists as “autonomous investment”—that is, investment that is not linked to the immediate ups and downs of GDP. (18)
The Extension of Wireless to Physical Industries
Wave 2 was focused on “digital industries,” where the output can be reduced to bits and bytes. This includes games, music, communications, social networks, news, advertising, financial services, and ecommerce purchases of digital goods such as hotel and plane reservations. These digital industries, while important, make up less than 20 percent of the economy. (19) (Formally defined, the digital sector includes computer and electronics manufacturing; ecommerce; software and other publishing; video and audio content; broadcasting; telecommunications; data processing; internet publishing and search; and computer systems design and programming. Slight changes to the boundary of the digital sector does not affect the analysis here).
Wave 3, by contrast, is based on the applications of wireless to the challenges and opportunities in physical industries, such as agriculture, energy, construction, manufacturing, transportation, education, healthcare, and government (including defense).
Physical industry use cases include low-power wireless sensors that must operate for long periods in a field, say, without a battery replacement, or a low-latency connection to a drone or autonomous vehicle.
Table 4 shows the key physical sectors had slow or negative productivity growth during the second wave (in general 1 percent annual productivity growth is adequate and 2 percent is good, so none of these industries made the grade). Slow or negative productivity growth means less competitive industries, weaker wage gains, and lesser quality jobs.
Surprisingly, most of these industries had low and falling spending on telecommunications services, as a share of total output (for most industries, total output can be interpreted as revenues. For defense, total output can be interpreted as spending including accounting for depreciation). (20) For example, in agriculture, the amount spent on telecom services went from a very low 0.16 percent in 2007 to an even lower 0.13 percent. (To provide some context, in 2018 the average telecom share for digital industries was 3.5 percent, and the average telecom share for physical industries was 0.7 percent).
5G is likely to reverse both of these trends. Faster, more versatile wireless communications are an essential factor in driving productivity gains. Research shows that industries like manufacturing, construction, and healthcare have lagged in digitization, helping explain why productivity growth has been so slow. To increase productivity, physical industries need the ability to gather information from widely dispersed sensors and to use that data to control activities in real-time. That’s not possible without faster and more versatile wireless communications supplied by 5G.
The ability to rapidly communicate data and information using 5G will increase productivity gains in both the public and private sectors. And these productivity gains, in turn, will lead to higher revenue, faster wage gains, advances in job quality, and increased international competitiveness.
In 2017, a study from the Technology CEO Council examined the impact 5G will have on productivity growth in the “physical industries” and tax revenues over the next 15 years.21 The report estimated that the physical industries will boost annual economic growth by 0.7 percentage points over the next 15 years, generating an additional $2.7 trillion in annual economic output, $8.6 trillion in wage and salary payments, and $3.9 trillion in federal tax revenue.
The 5G Revolution and Job Growth
The impact of 5G on jobs can be summarized as “network meets the cloud.” That means we can push more capabilities out to the edge, including real-time and near-real-time applications of machine learning and artificial intelligence to the physical world. In many cases, new technologies create new tasks and markets that didn’t exist before. (22) For example, healthcare providers already monitor medical equipment like pacemakers remotely. But with 5G, the set of possible at-home diagnostics or interventions will expand greatly, and telehealth installers and maintainers will be a highly valued occupation.
5G will greatly expand the capabilities of drones in a range of applications from agriculture to military to logistics, especially in conjunction with artificial intelligence. That will expand the market for skilled drone operators, sometimes called “remote-pilots-in-command,” earning as much as $100,000 per year.
The other alternative is that productivity gains will lower costs enough to expand the market, which ends up creating new jobs. (23) That’s what happened in ecommerce. The use of robots in ecommerce fulfillment centers, combined with effective use of data, helped drive down costs low enough to offer consumers fast delivery and easy returns. And the combination of fast delivery and easy returns, in turn, made the ecommerce proposition irresistible to many consumers, because now they could avoid the time and trouble of going to the store, getting the product quickly and simply returning it for free if it didn’t work. The result was a massive shift from unpaid household shopping hours to paid ecommerce fulfillment and delivery hours. (24)
Or consider manufacturing. The pandemic has called into question the wisdom of depending on global supply chains for important medical supplies, and by extension, any parts that one might need in a crisis.
The low-latency high-bandwidth services delivered by 5G can help spur the digitization of the factory floor, boosting productivity and increasing flexibility. (25, 26) The result could be a shift to distributed local manufacturing in the U.S. in the post-COVID era, creating jobs and shortening supply chains.
Table 5 identifies examples of Wave 3 jobs. Unlike Wave 2, which mostly generated “cognitive” tech jobs which required a college education, Wave 3 is rooted in the physical world. As a result, Wave 3 will also create mixed ‘cognitive-physical” skilled jobs, many of which fall into the category of installers and maintainers. In addition, people will continue to play an essential role in the supervision loop of advanced robots.
The types of cognitive jobs listed in Table 5 mainly fall into the broad occupational class of “computer and mathematical occupations.” Relative to the median wage for all occupations, these jobs pay a wage premium of 122 percent.
But Wave 3 will also generate blue-collar jobs that use a combination of manual and problem-solving skills—what we call “cognitive-physical” jobs— which are likely to pay a wage premium as well.
Today, the median wage for telecommunications equipment installers and repairers is 45 percent higher than the overall median wage, according to figures from the BLS. As 5G becomes an integral part of business operations, we would expect such jobs to become more valuable rather than less.
III. QUANTIFYING LONG-TERM 5G-RELATED JOBS
Estimates of job growth spurred by a new technology have to be measured against some baseline. As we noted earlier, the BLS projection methodology typically looks backward, not forward, and has a difficult time dealing with ongoing technological changes. BLS projections have consistently understated the job impact of wireless innovation. In the first wireless wave, jobs in the wireless industry came in 50 percent above projections. In the second wireless wave, the rise of the App Economy drove up demand for computer and mathematical jobs 21 percent above BLS projections as of 2019.
Our fundamental assumption is that unlike the second wave—which was mostly focused on digital industries—the third wave will drive demand for both cognitive and cognitivephysical jobs across the whole range of physical and digital industries. The third wave will therefore benefit a wider set of Americans and regions than the second wave did. We therefore adopt a simple and straightforward approach to estimating the impact of 5G on jobs. We start with the latest BLS industry and occupation projections, issued in September 2019, for the 2018-2028 period. We rebase them to 2019 and extend them to 2034 to get a 15-year projection.
Then we assume that the additional jobs produced by 5G in the third wave, relative to the baseline, are the same magnitude as the additional jobs produced by wireless innovation in the second wave. We then allocate these jobs across industries according to their size, rather than focused on only tech. Finally, we then apply a conservative job multiplier.
Based on these assumptions, we estimate that 5G and related technologies will produce an additional 4.6 million jobs in 2034 relative to the baseline original projected growth of 12.8 million.
When we say ‘additional’ we mean that 5G-driven job growth is an additional factor that the conventional projections do not take into account. In an important sense, 5G job creation is a countervailing force to job destruction from automation and globalization. These are higher paying jobs that will replace jobs that are lost.
Past Reports Projecting 5G impact On Jobs
In 2017, Accenture released a report estimating wireless operators will directly invest $275 billion between 2017 and 2024 in 5G infrastructure, creating up to 3 million jobs and boosting GDP by $500 billion.27 Of the $275 billion investment, $93 billion was estimated to be spent on construction, with the remainder being allocated to network equipment, engineering, and planning. Importantly, the report recognized this growth will be spread across communities of all sizes. “Small to medium-sized cities with a population of 30,000 to 100,000 could see 300 to 1,000 jobs created. In larger cities like Chicago, we could see as many as 90,000 jobs created,” the authors wrote.
More recently, a report on the global economic impact of 5G was released in November 2019 by IHS Markit, updating a 2017 study. (28) This report looked at several measures of 5G impact. First, the report forecast that between 2020 and 2035, global real GDP would grow at an average annual rate of 2.5 percent, with 5G contributing almost 0.2 percent of that growth. Second, the report looked at the seven leading countries for 5G—the United States, China, Japan, Germany, South Korea, the United Kingdom, and France—and found that the collective investment in R&D and capital expenditures by firms that are part of the 5G “value chain” within these countries will average over $235 billion annually, measured in 2016 dollars. The U.S. and China each accounted for about one-quarter of global spending on 5G R&D and capital expenditures. Third, the IHS Markit report estimated that 22 million jobs would be supported by the 5G value chain globally in 2035, with 2.8 million of those jobs in the United States.
Most recently, two economists at NERA Economic Consulting, Jeffrey A. Eisenach and Robert Kulick, estimated the potential job impact of 5G. (29) They found that if 5G adoption followed the path of 4G adoption, then, “at its peak, 5G will contribute approximately 3 million jobs and $635 billion in GDP to the U.S. economy in the fifth year following its introduction.” This employment effect is smaller but faster than the one reported here.
IV. KEY 5G USE CASES
As previously noted, The 5G Revolution will create job opportunities across many sectors and regions in the U.S. In this next section, we identify eight of the most likely use cases that have significant potential for job growth.
1. AGRICULTURE
Agriculture is an industry ripe for transformation. In many areas of the country, it is still heavily dependent on low-cost labor, which may be discouraged because of the pandemic. And as of 2018, only 0.1 percent of agriculture revenues were being spent on telecommunications, a percentage that had dropped slightly since 2007.
Faced with an evolving environment with increasing temperatures and diverging precipitation levels in wet and dry areas, precision agriculture will rely on an interconnected system of low power sensors, integrated equipment, and data—all powered by 5G—to monitor field conditions and maximize yields while efficiently allocating scarce resources such as water. (30)
To best utilize the new technologies, agriculture will have to build and maintain a new tech and telecom infrastructure and the workforce is only now starting to come into existence. This requires both software developers and people to install and maintain the equipment.
For example, as of March 2020, agriculture technology company Farmers Edge was looking for a precision technology specialist to install equipment and software at its growers’ farms in Madison, Wisconsin.
2. CONSTRUCTION
5G plays an essential role in digitizing construction, a key sector which has been plagued by high costs and low productivity in recent decades, especially in public infrastructure. (31) Perhaps not coincidentally, construction is one of the least digitized sectors of the economy. (32)
Since 2000, the cost of construction has risen 118 percent according to the Bureau of Economic Analysis. (33) Highways and streets have become 126 percent more expensive for state and local governments to invest in. (34) By comparison, overall prices in the economy have only risen 41 percent over the same time span. (35)
This increase in the relative price of construction helps explain why U.S. infrastructure seems shoddier and worn-out these days.
A 5G communication grid will allow the seamless and flexible integration of automated equipment and skilled workers on a construction site. Structures will go up faster with fewer dangerous errors, and worksites will be safer. Meanwhile, as 5G helps bring down the cost of construction, demand will rise. Both renovation and new building will be cheaper and faster.
3. UTILITIES
Energy use management is an essential use case for 5G. Utilities are already extensive users of information technology within their own operations to monitor power production and distribution. But 5G makes it much easier to connect up smart meters to the grid to give people and businesses better incentives to control their electric use.
This is one sector where our projection methodology may underestimate the number of new 5G-related jobs. If the energy infrastructure shifts over the next 15 years from fossil fuels to low-carbon energy sources, the opportunities for 5G-enabled workers may be very strong.
4. MANUFACTURING
In manufacturing, 5G and digitization will help reduce costs, making domestic manufacturing more competitive. Many manufacturing industries have weak or even negative multifactor productivity growth over the past 20 years. (36) Multifactor productivity growth takes into account the usage of purchased services, energy, capital, and intermediate inputs and is a key measurement of competitiveness. Investment in information technology such as 5G, which manufacturing has lagged in since the early 1990s, will enable new business models that expand markets and enhance domestic competitiveness.
New markets and reinvigorated domestic competitiveness means more jobs in the U.S. Through a combination of digitized distribution, digitized production, and new manufacturing platforms – coined by PPI as the Internet of Goods – a new network of smallbatch and custom goods factories will likely arise. Importantly, these industrial startups will fuel job creation in low-density areas and former industrial hubs like the Midwest and upstate New York, as physical industries like manufacturing dominate these economies. That means more domestic production and less imports. (37)
5. TRANSPORTATION AND WAREHOUSING
5G will transform how people and goods move from point to point and how cities manage traffic. This has major implications for industries ranging from defense and transportation to logistics and delivery.
Low-latency 5G connections will accelerate the roll-out of fully autonomous trucks and cars. But the flip side is that these vehicles will have to be maintained to a very high standard to keep them safe, creating more jobs for skilled technicians, and compensating for the loss of truck driver jobs.
These capabilities depend on the speed of 5G to rapidly relay data. In trucking, a report by McKinsey recognizes, “sixty-five percent of the nation’s consumable goods are trucked to market. With full autonomy, operating costs would decline by about 45 percent, saving the US for-hire trucking industry between $85 billion and $125 billion.” (38) This savings from automated trucking could be passed onto consumers in the form of lower prices. Delivery drones stand to further disrupt how goods are delivered.
And in traffic management, traffic signals will be based on real-time traffic flow rather than timed stoplights. Pittsburgh recently introduced smart traffic lights and saw travel times cut by 25 percent. (39) These innovations reduce the need for drivers and increase the need for maintenance and road workers as driving and delivery become less physically intensive and goods can be moved around the clock.
The creation of new types of jobs is already starting. As of March 2020, transportation services company Transdev Services was hiring a self-driving vehicle operator in San Francisco, California. Technology platform Argo AI was seeking an autonomous vehicle system test specialist responsible for operating its autonomous test platforms in Miami, Florida. And transportation services firm MV Transportation was searching for an autonomous vehicle attendant tasked with ensuring the safe operation of the Autonomous Vehicle in Corpus Christi, Texas.
6. EDUCATION (PUBLIC AND PRIVATE)
Students and teachers at all levels were forced to adopt virtual learning in 2020 because of the pandemic. Reports from the field have been mixed. The technology in many cases was not up to the task, and many students, especially in low-income neighborhoods, were caught on the wrong side of the digital divide. If schools want to engage in virtual learning, they will need a technology like 5G with the bandwidth for students and teachers to fully engage.
A related issue is training of workers on new equipment and processes. As 5G moves into the workplace, it will transform the way that physical industries such as manufacturing and healthcare do business. In order for workers to stay relevant, the training technology has to become 5G-enabled as well.
7. HEALTHCARE
As with education, the pandemic forced healthcare providers to adopt ad hoc telehealth practices without the proper technology. 5G will provide the framework in which providers can truly practice healthcare at a distance. Moreover, 5G is essential to unlocking quality healthcare for rural, low-density areas because of its ability to support real-time high-quality video, transmit large medical images, and enable real-time remote monitoring.
Maintaining the telehealth infrastructure will be a core function at hospitals, which will employ skilled telehealth technicians, just like they have lab technicians and nurses. Clinical information will flow wirelessly into electronic health records, requiring specialized database specialists who are trained in the medical and privacy requirements of these types of data. As of late April, Beth Israel Lahey Health of Beverly, Massachusetts was looking for a “telehealth installer.”
8. GOVERNMENT (EXCEPT EDUCATION)
We can divide the impact of 5G on government into military and civilian uses. On the military side, a March 2020 report from the Congressional Research Service noted: “5G technologies could have a number of potential military applications, particularly for autonomous vehicles, command and control (C2), logistics, maintenance, augmented and virtual reality, and intelligence, surveillance, and reconnaissance (ISR) systems—all of which would benefit from improved data rates and lower latency (time delay).” (40)
In fact, the USDOD has already released several Requests for Prototype Proposals for test beds focusing on AR/VR for training, smart warehouses and dynamic spectrum sharing. All of these potential applications generate new human resource demands as well. As the capabilities of 5G evolve, it becomes more important than ever to best make use of resources, both in terms of equipment and people. For example, as of summer 2020, The Aerospace Corporation was looking for a “5G and Internet of Space Things Wireless Network Engineer” with the ability to obtain a U.S. security clearance.
On the civilian side, “smart cities” development will mean that state and local governments will have to transform all of their services to 5G, from waste collection to police to property tax assessment. And that will, in turn, mean a workforce much more heavily oriented towards maintaining and repairing the necessary telecom equipment.
Where Will Wave 3 Jobs be Located?
Both the first and second wave of wireless jobs were concentrated in dense digital cities like San Francisco, New York and Boston.
Table 7 shows examples of top “digital” areas, as ranked by the share of local GDP coming from the information sector, the financial services sector, and the professional services sector (which includes law, engineering, and accounting, as well as computer programming).
Not surprisingly, the list of the top digital metro areas is headed by New York and San Francisco. There’s one important caveat: for confidentiality reasons, the Bureau of Economic Analysis suppresses some data, so we can’t calculate the digital share for all metro areas.
EXAMPLES OF TOP DIGITAL METRO AREAS
1. Boston-Cambridge-Newton, MA-NH
2. Boulder, CO
3. New York-Newark-Jersey City, NY-NJ-PA
4. San Francisco-Oakland-Berkeley, CA
5. Seattle-Tacoma-Bellevue, WA
*Listed alphabetically. Inclusion based on digital share, which measures the share of the information, financial services, and professional services sectors in overall metro GDP Data: BEA
By contrast, Wave 3 will benefit those areas which are more balanced in terms of digital and physical industries. Table 9 shows some examples of such areas. These areas are not tech deserts, for sure, but they are well-positioned to take advantage of the opportunities offered by 5G.
EXAMPLES OF BALANCED DIGITAL/PHYSICAL METRO AREAS
1. Albany-Schenectady-Troy, NY
2. Ann Arbor, MI
3. Baltimore-Columbia-Towson, MD
4. Buffalo-Cheektowaga, NY
5. Cleveland-Elyria, OH
6. Colorado Springs, CO
7. Detroit-Warren-Dearborn, MI
8. Harrisburg-Carlisle, PA
9. Huntsville, AL
10. Jacksonville, FL
11. Kansas City, MO-KS
12. Lincoln, NE
13. Pittsburgh, PA
14. San Antonio-New Braunfels, TX
*Listed alphabetically. Inclusion based on digital share, which measures the share of the information, financial services, and professional services sectors in overall metro GDP Data: BEA
V. SHORT-TERM SNAPSHOT: THE IMMEDIATE IMPACT OF 5G
So far, we have been discussing the longterm job impact of 5G. But in the wake of the COVID-19 pandemic, we need to be concerned about the short-term job impact as well. In this section, we show that current 5G build-out and engineering activities has already created 106,000 jobs as of April/May 2020 (Table 9).
Estimating 5G Network Build-out Jobs
Network build-out activities, of course, consist of installing 5G small cells around the country, including their backhaul connections. In some cases, the technicians and installers are employed directly by the carriers, while in other cases they are contractors. These are cognitive physical jobs, in the sense that we discussed earlier in the rep
ort. We get data on this employment from two different sources. First, the BLS track
s the number of “Radio, Cellular, and Tower Equipment Installers and Repairers” in its Occupational Employment Statistics (OES). (41) As the name suggests, this category includes the workers who install 5G access points. As of May 2019, the last data available, there were 14,370 workers in this occupational category, with a relative standard error of 5.8 percent. Factoring in a conservative job multiplier, that gives us a net job impact of 43,000.
How are those jobs distributed? The top state according to the BLS data is Texas, followed by New Jersey, California, and Florida. These figures were as of May 2019 and based on several years of rolling surveys (Table 9).
Of course, the location of build-out activity changes over time as providers finish with one area for now and shift their construction activities to other area. To understand current 5G construction activity, we turn to another data source: publicly available job postings. These job postings contain information on the location of jobs and also the skills needed. For example, one company is advertising for a “Tower Top Hand” with 5G experience in the Baltimore area.
The database of job postings that we use comes from Indeed.com, which identifies itself as “the #1 job site in the world.”(42) Indeed’s real-time database of job postings is full-text Booleansearchable, including by title, location and by age of job posting.
We searched for job postings with the terms “tower” or “technician” in the title, and 5G in the body of the posting. This allowed us to identify “hot spots”—metro areas where there was current hiring activity for workers installing 5G networks (Table 11).
As of early May, companies are hiring for tower technicians in areas such as Allentown, Pennsylvania and the Baltimore metro area, as telecom providers extend their 5G networks outside of the densest high-income urban areas. Indeed, local news publications in these areas show evidence of discussions about ongoing deployments. (43)
Current 5G Engineering and Software Jobs
Making 5G a reality will also require hiring in engineering and software development. But unlike cell and tower installers and repairers, there is no obvious BLS occupational category that matches up well to 5G engineers and software developers.
To understand the prevalence and location of 5G engineers and developers, we further analyze the universe of online job postings, using a methodology that was developed to estimate the number and distribution of App Economy jobs.
These job postings contain information on the location of jobs and also the skills needed. For example, in late April and early May 2020, Commscope was advertising for an “Engineer, Principal 5G Systems” in Richardson, Texas. Epsilon Solutions was advertising for a contract “Wireless Core Engineer” to “test, deploy and debug DISH’S standalone 5G network” in Denver, Colorado. And KaRDS Cyber Solutions in Annapolis Junction, Maryland was advertising for a “5G Wireless SME / Senior Systems Engineer Level 6.” This position required a “TS/ SCI clearance with polygraph.
We started by searching for job postings with the words “engineer” or “developer” in the title, with postings aged 30 days or less. This gave us our initial pool of roughly 50,000 postings nationally as of the end of April. Generally speaking, our past research has suggested that searches with no age limit work better, but because of the pandemic-related shutdowns, we decided to focus on the more recent job posts.
Within that pool, roughly 0.6 percent contain the term 5G. By contrast, job postings containing the terms IoT, Android or iOS, or mobile are far more common (Table 12). We then use this share of job postings to estimate the share of jobs (see Appendix). There are roughly 1.75 million engineers, and an equal number of software developers, according to BLS. Taking 0.6 percent of that total comes to roughly 21,000 jobs, and then accounting for the multiplier gives us 63,000 5G-related engineering related jobs.
A First Look at China
We gain some insights into the Chinese 5G labor market through analysis of online job postings in both English and Chinese, as collected by Indeed.com. This approach is limited because of the lack of visibility into hiring by key 5G companies such as Huawei, China Telecom, and Tencent, so we cannot arrive at an overall number. Nevertheless, even a preliminary analysis may be useful.
We consider job postings which include ‘5G’ in the title and were released 30 or fewer days ago. For example, in the U.S., CommScope posted an opening for a 5G Systems Architect. As of August 17, 2020, the U.S. had 85 such new postings, compared with 125 for China. As noted, the China sample is significantly incomplete.
To put these numbers into some context, over the same period, the U.S. had 14370 new postings with ‘software’ in the title, while China had 4137 new postings with ‘software’ in the title (in either Chinese or English). That suggests the intensity of Chinese hiring of 5G personnel, relative to hiring of software personnel overall, is higher than in the U.S.
These jobs are very heavily concentrated in a relatively small number of states. California and Texas by themselves account for almost 50 percent of 5G engineering job postings. This makes sense given the location of the leading companies in the 5G space.
VI. THE KEY INPUT TO 5G JOBS: CAPITAL INVESTMENT AND SPECTRUM ACCESS
5G is a capital-intensive investment by its nature. To realize its benefits, wireless operators must invest in R&D and capital expenditures in engineering and network buildout. In a 2017 study, Accenture estimated wireless operators will invest $275 billion from 2017 to 2024, $93 billion of which will be spent on construction. (44) Indeed, via its Investment Heroes series, PPI estimates the major wireless operators have invested more than $150 billion in the United States since 2016, much of which has gone towards 5G R&D and deployment. (45, 46)
The portion of spectrum to be most used for 5G is divided into two categories: millimeter wave (above 24 GHz) and sub-6 (6 GHz and below). (47, 48) Each of these spectrum ranges will play a vital role in bringing 5G products and services online. While mmWave has the fastest speeds, it has limited range and is not able to tolerate much interference like walls or rain. (49) In the sub-6 spectrum, the range is better than that of the mmWave, but speeds are reduced. While mmWave will be utilized in dense population areas such as downtown areas and stadiums to transmit data, sub-6 will be critical to providing access to IoT products in suburban and rural areas.
Spectrum for commercial use is controlled by the Federal Communications Commission (FCC). One of the ways the FCC distributes spectrum is by auctioning licenses, with the proceeds going to the Treasury Department. Since 1994, the U.S. government has raised over $100 billion in revenue from wireless companies participating in FCC spectrum auctions. (50) The FCC’s first 5G spectrum auction, the mmWave of 28 GHz, was conducted in November 2018.51 The FCC followed by auctioning the 24 GHz band in March 2019, and the 37, 39, and 47 GHz bands in December 2019. (52, 53)
Much of the spectrum used by mobile networks to date have been concentrated in the sub-6 bands of 600 MHz to 2.6 GHz. These mid- to low-bands are likely to be used for 5G as well to achieve wider geographical coverage. As of April 2019, the FCC had awarded 716 MHz of spectrum below 3 GHz. (54) Additionally, the FCC has designated the 2.5 GHz band to “be available for commercial use via competitive bidding”. (55) The FCC ran an auction the 3.5 GHz band in July and August 2020. (56) And in February, the FCC ordered satellite operators in the 3.7- 4 GHz range to relocate, freeing the space for reallocation by December 2023. (57)
The other mechanism by which the FCC distributes spectrum is by allowing unlicensed use of certain spectrum – for purposes such as Wi-Fi. Under this regime, operators can use designated airwaves to transmit data without getting permission from the FCC. (58) However, the lack of exclusivity in unlicensed bands means an increased risk of interference. In March 2019, the FCC freed up the 116-123 GHz, 174.8-182 GHz, 185-190 GHz, and the 244-246 GHz bands for unlicensed use. (59) And in April 2020, the FCC proposed rules to make the entire 6 GHz band available for unlicensed use. (60)
International Comparisons of Spectrum Allocations
In April 2019, Analyses Mason released a report summarizing certain countries’ spectrum allocations. (61) The countries had comparable amounts of spectrum below 3 GHz awarded, with the U.S. coming in first at 716 MHz, Australia in second at 690 MHz, Germany at third with 689 MHz, Canada fourth with 648 MHz, and the United Kingdom rounding out the top five with 647 MHz. Asian countries have allocated similar amounts of spectrum below 3 GHz, with Japan at 601 MHz, Hong Kong at 583 MHz, China at 582 MHz, and South Korea at 477 MHz.
Awarded spectrum from 3-24 GHz had greater variation among countries. “Whilst many countries have now awarded over 100MHz of (exclusive nationwide) spectrum to mobile, several countries (China, Italy, and Spain) have awarded 300MHz or more,” the authors write. Following those three countries were South Korea, the U.K., Australia, Japan and Qatar – all with 200 MHz or more allocated. Notably, the U.S., Canada, France, Germany, and Hong Kong had not awarded any of this spectrum as of April 2019. As previously mentioned, sub-6 spectrum is a critical component to delivering new 5G products and services outside of high population density areas because of its ability to travel long distances while still providing 5G speed.
In the mmWave range, only the U.S., South Korea, and Italy had awarded spectrum. The U.S. had awarded 2,500 MHz, South Korea 2,400 MHz, and Italy 1,000 MHz as of April 2019. Other countries in the analysis had mmWave allocations planned, ranging from the second half of 2019 to 2021. The U.S. leads in the total amount auctioned or planned to be auctioned at about 7 GHz, followed closely by China at 6 GHz, and Canada at nearly 5 GHz. Australia, France, Germany, Spain, Sweden and the U.K. all planned to assign around 3 GHz.
A broader February 2020 analysis of countries conducted by Global Mobile Suppliers Association found 40 countries have completed allocations of 5G suitable spectrum since 2015. (62) “A total of 54 countries have announced plans and approximate dates for allocating 5G-suitable frequencies with timelines for completion between now and end-2022,” the authors note.
The economic and national security implications of 5G are why the U.S. needs a long-run spectrum plan. In September 2018, the FCC unveiled its ‘5G FAST’ plan, detailing the previously discussed spectrum that it intends to make available for 5G services. (63) In October 2018, the Trump Administration issued a presidential memorandum directing the Department of Commerce to create a National Spectrum Strategy, but the strategy has not yet been released.
VII. POLICY IMPLICATIONS AND CONCLUSION
There are four important policy issues when it comes to 5G. First, as we have been discussing, is spectrum. As 5G opens up the physical industries to joining the digital economy, it becomes ever more imperative to have a longterm spectrum plan. Unlicensed spectrum, sub-6 spectrum, and mmWave spectrum all serve different purposes in the 5G ecosystem but are critical to realizing the full economic benefits of 5G.
The amount of spectrum suitable for 5G use is limited and thus needs to be allocated efficiently. Policymakers should prioritize a long-term spectrum plan that frees up more licensed and unlicensed spectrum, provides certainty for auctions in terms of cost and scheduling, streamlines government licensing and renewals, and encourages long-term investment in 5G networks.
5G is also critical to national competitiveness and security. As an April 2019 report from the Defense Innovation Board recognizes, leadership in 5G carries economic and national security advantages such as rapid communication systems, enhanced decision-making and strategic capabilities, better technology, standard setting, and job creation. (64) But, as the report notes, the physics of mmWave are challenging. Additionally, the sub-6 band is crowded with incumbent systems and uses, large portions of the spectrum are government owned and commercially limited, and there are concerns the Defense Department could experience reduced capability if it is required to share its sub-6 spectrum. While the Trump Administration has directed the Department of Commerce to create such a National Spectrum Strategy, it has not yet been released. For the U.S. to meet the challenges ahead, a national spectrum plan must carefully balance the government’s needs and what 5G will require in the long-term.
The second policy issue is increased government usage of 5G across both military and civilian activities. The public sector should be a leader in exploring cutting edge uses of 5G in areas like the delivery of government services and battlefield control-and-communications.
Third, Congress should be willing to invest heavily in the development of 5G and successor technologies. That’s essential if the U.S. is to keep up with foreign competitors, who are already focused on the military uses of so called 6G. (65) The federal government must start investing heavily in telecom research and development. The money should be split between nonprofits and for-profit companies, and the goal should be to create a new set of standards that American companies can build on.
And finally, the U.S. should make a significant investment in job training. The U.S. needs to double down on traditional STEM fields and encourage more people in America to go into engineering and math. Beyond that, we need a national skills initiative and mentoring programs to ensure that this new generation of workers will have the training needed to support the cognitive-physical jobs that the 5G Revolution is already beginning to create.
Methodology Appendix
In this paper we estimate both the long-term and short-term job impacts of the 5G Revolution, using different methodologies. Our 15-year estimates build on BLS employment projections, and assume a scenario where the employment impact of 5G is of the same percentage magnitude as the employment impact of Wave 2. The short run current job impact of the 5G build-out is estimated by a combination of BLS data and real-time job postings.
Context There are three main approaches for modeling the occupational impact of new technologies:
1. Consensus-based extrapolation of existing occupation-industry matrix, subject to industry employment constraints
2. Analysis of substitution effects of new technology on existing occupations
3. Modelling of new job creation by new technologies based on analysis of job impact of existing technologies. We call this the “bootstrap” approach.
Occupation-industry matrix In the United States (Bureau of Labor Statistics 2019), Canada (Canada Employment and Social Development Canada,2020), and other OECD countries, the main approach to modeling future occupational growth uses a detailed occupationindustry matrix. Industry growth is projected based on a macroeconomic model and an assumption of full employment, and “small changes” are made in the future coefficients of the occupation-industry matrix.
Because of their size and comprehensiveness, these models tend to be unique for their country. The BLS notes that “there are no comparable projections which are not in some way derived from BLS projections.”
However, such models in practice are not designed to pick up the occupational impact of disruptive technologies or the creation of new occupations. Indeed, the BLS explicitly benchmarks its model against what it calls the “occupational–share naïve model,” where the occupational share doesn’t change over time (BLS 2020).
Substitution effects of new technology
Frey and Osborne (2017) is the best-known example of projecting the potential substitution effects of new technology. By examining the tasks associated with particular occupations, they estimated that about 47 percent of total US employment is at risk of computerization.
However, the authors stress that their models only focus on the substitution effect of new technology, and provide no information at all about the job creation aspects of technology.
However, we make no attempt to forecast future changes in the occupational composition of the labour market. While the 2010-2020 BLS occupational employment projections predict US net employment growth across major occupations, based on historical staffing patterns, we speculate about technology that is in only the early stages of development. This means that historical data on the impact of the technological developments we observe is unavailable. We therefore focus on the impact of computerisation on the mix of jobs that existed in 2010. Our analysis is thus limited to the substitution effect of future computerisation.
For this reason, the substitution effect approach is inappropriate for this project.
Bootstrap approach
What we call the “bootstrap approach” uses the employment effects of previous technological advances to project the impact of future technologies. Shapiro and Hassett (2012) estimated the employment impact of 3G, and used that to project the impact of 4G. Accenture (2017) used the Shapiro-Hassett results for 3G to project the impact of 5G. Eisenbach and Kulik (2020) estimated the employment impact of 4G, and used that to project the impact of 5G.
In this project, we use the bootstrap approach, taking into account the new characteristics of 5G compared to 4G. We model the employment impact of 5G as a deviation from the BLS baseline forecast, based on the observed magnitude of the 4G deviation.
But whereas the employment impact of 4G was completely concentrated in white collar jobs and digital industries, we model the employment impact of 5G as extending to blue-collar jobs that use a combination of manual and problem-solving skills—what we call “cognitivephysical” jobs. Moreover, we model the industry impact of 5G as extending over the entire economy, including physical industries such as manufacturing, agriculture, and defense.
Here’s where the genuinely disruptive nature of 5G comes into play. We expect 5G to enormously increase telecom usage by physical industries, as 5G becomes an integral part of operations. However, as of the 2018 input-output data from the Bureau of Economic Analysis, telecom usage is still an extremely low share of intermediate inputs for many industries (see Table 4). As a result, current telecom usage is not a useful guide as to what industries will add workers with 5G.
In addition, to the degree that 5G usage is integrated into operations in physical industries, we would expect that the number of telecom installers and maintainers would increase. That has not yet happened under 4G. Indeed, the number of telecom installers and maintainers fell in 2019, according to BLS data (346K in 2018, versus 315K in 2019).
When dealing with technological trends that have not yet appeared in the official data, it is preferable to adopt the smallest number possible of conservative assumptions. In this case the model uses the employment category of “telecom installers and maintainers” as a proxy for skilled blue-collar, or “cognitive physical” jobs generated by 5G, as described on page 40 of the report. The model uses the employment category of “computer and mathematical occupations” as a proxy for cognitive jobs generated by 5G. And the model distributes the number of 5G jobs across all industries in proportion to their total employment. The model generates a conservative projection of 5G jobs by industry, based on the employment performance of 4G plus a small number of additional assumptions about the difference between 4G and 5G.
We recognize that totally new occupations generated by 5G might fall outside those categories 15 years from now. But given that 5G is just rolling out right now, we don’t have the data necessary, for example, to produce a credible forecast of the number of precision sensor installers that the agriculture sector will need to hire in 2033.
We also note that both the short term and long term models are completely agnostic about whether the 5G networks are built by the current cellular operators or by private enterprise. In fact, that is a strength of the methodology that we use. Industry-specific data was used to analyze Wave 1. But Wave 2 and Wave 3 are modeled based on occupational data which does not reference the cellular operators at all.
Long-term Estimate
The BLS regularly lists projections of employment trends by occupation and industry. As we showed in Tables 1 and 3, these projections underestimated the employment impact of the Wave 1 telecom boom by 50 percent after 10 years. The employment impact of the Wave 2 telecom boom on tech jobs was underestimated by 21 percent after 12 years.
To calculate this underestimate, we applied the projected growth rate of computer and mathematical occupations, derived from the 2007 and 2009 vintage projections, and applied it to the 2007 figure for computer and mathematical occupations from the Current Population Survey (CPS). Then we compared the result to the 2019 figure for computer and mathematical occupations from the CPS. We use the CPS data as the benchmark for the underestimate calculation because it gives the best available measure of the actual growth of tech jobs over time.
The analysis in this paper is based on the employment projections released in September 2019 for the time period 2018-2028. As in the past, these projections clearly do not have a telecom boom built into them. (A new set of projections were released in September 2020, after the analysis of this paper was completed. The new projections do not significantly change the results).
We will use a scenario for 5G jobs which is similar in one major respect to the Wave 2 boom, and different in two other aspects which reflect the particular characteristics of 5G.
As in Wave 2, we estimate that actual computer and mathematical employment (tech jobs) is 20 percent above the baseline BLS projection after 12 years (extending the projections an extra two years). These jobs are a proxy for cognitive jobs. (To be conservative, we use the occupational estimates from the BLS projection report as our 2018 starting point, rather than the somewhat higher CPS figures).
Unlike Wave 2, we estimate that actual number of telecommunications installers and repairers also come in 20 percent above projections after 12 years. These occupations are a proxy for skilled blue-collar, or “cognitive-physical,” jobs.
We allocate the additional jobs proportionally across all industries. By contrast, in Wave 2 the gains mainly came in digital industries.
We also use a conservative job multiplier of 3—that is, two additional indirect jobs for each direct job created by 5G (Bartik and Sotherland, 2019). By contrast, tech jobs are often assumed to create as many as five indirect jobs (MIT Sloane Review, 2012).
Short-term Estimate
We derive the number of “Radio, Cellular, and Tower Equipment Installers and Repairers” from the May 2019 Occupational Employment Statistics (OES). (68) As the name suggests, this category includes the workers who install 5G access points. However, by the nature of network build-out, where tower technicians were working last year may not be where they are working today. So we used the real-time database of job postings maintained by Indeed.com, which identifies itself as “the #1 job site in the world.” (69) Job postings are regularly used by economists as a rich data source. (70) Indeed’s real-time database of job postings is full-text Boolean-searchable, including by title, location and by age of job posting. We searched for job postings with the terms “tower” or “technician” in the title, and “5G” in the body of the posting.
For example, as of early July 2020, a staffing firm was looking for a “Tower Climber Technician” to work on maintaining and repairing 5G networks and based in the Detroit area. That gives us an indication of where mobile carriers or their contractors are hiring.
We also used job posting data to estimate the number of engineers nationally working on 5G projects. We started by searching for job postings with the words “engineer” or “developer” in the title, with postings aged 30 days or less. This gave us our initial pool of roughly 50,000 postings nationally as of the end of April.
Within that pool, roughly 0.6 percent contain the term 5G. The key assumption is the percentage of job postings for engineers and developers that include the term “5G” is a reasonable estimate of the percentage of engineers or developers that are involved in 5G development. Past research has supported this assumption.
Additional References
Accenture. 2017. “Smart Cities: How 5G Can Help Municipalities Become Vibrant Smart Cities.”
Timothy Bartik and Nathan Sotherland. 2019. “Realistic Local Job Multipliers,” WE Upjohn Institute, April 1, 2019.
Bureau of Labor Statistics. 2019. “Projections overview and highlights, 2018–28,” Monthly Labor Review, October 2019.
Bureau of Labor Statistics. 2020a. “Occupational Projections Evaluation: 2008–2018”
Bureau of Labor Statistics. 2020b. “Occupational Employment Statistics,” https://www.bls.gov/oes/
Jeffrey A. Eisenach and Robert Kulick. 2020. “Economic Impacts of Mobile Broadband Innovation: Evidence from the Transition to 4G,” American Enterprise Institute, May 2020.
Employment and Social Development Canada. 2020. “Canadian Occupational Projection System (COPS) – 2019 to 2028 projections.”
Carl B. Frey and Michael A. Osborne. 2017. “The Future Of Employment: How Susceptible Are Jobs To Computerisation?” Technological Forecasting and Social Change, 2017, vol. 114, issue C, 254-280.
AnnElizabeth Konkel. 2020. “Healthcare and Medical Research Postings Decline,” Indeed, July 9, 2020. https://www.hiringlab. org/2020/07/09/healthcare-postings-decline/
MIT Sloan Review. 2012. “The Multiplier Effect of Innovation Jobs,” MIT Sloan Reiew, June 6, 2012. https://sloanreview.mit.edu/article/themultiplier-effect-of-innovation-jobs/
Robert J. Shapiro and Kevin A. Hassett. 2012. “The Employment Effects of Advances in Internet and Wireless Technology:Evaluating the Transitions from 2G to 3G and from 3G to 4G.”
President Donald Trump is desperate to make this campaign about anything other than the economic disaster his incompetence has largely caused. But Joe Biden can’t let him do it. Biden’s own robust economic recovery plans must become the Biden-Harris ticket’s key election message.
And no wonder. More than 22 million Americans lost their jobs just in March and April as Donald Trump bungled the COVID crisis, but more than half of those jobs have yet to return. Job growth in July was less than half that of June. And the new August numbers out last Friday being touted by the administration in fact barely make a dent in this new structural unemployment. The actual unemployment rate may be closer to 9% due to misclassification, according to Bureau of Labor Statistics, andover 29 million people were receiving unemployment benefits as of mid-August.
While House Democrats and Senate Republicans remain at an impasse over how generous unemployment benefits should be in the current recession, a potentially greater problem is looming: millions of unemployed Americans will see their benefits terminated prematurely unless Congress takes additional action in the next three months. What’s more, many workers are forced to clear bureaucratic hurdles to qualify for extended benefits Congress approved last spring to help them ride out the pandemic.
This piece explains why jobless Americans are entangled in red tape and on course to lose their benefits at the end of this year. Congress should fix these problems by tying the duration of unemployment benefits to actual economic conditions rather than arbitrary deadlines, streamlining the transition from regular benefits to extended pandemic benefits, and requiring the states to do a better job of informing workers about special pandemic extensions.
Not All Unemployed People Are Eligible for the Same Number of Weeks
People who lose their jobs through no fault of their own can typically draw unemployment benefits for 26 weeks. When unemployment spikes, the Extended Benefits (EB) program automatically extends the duration of benefits, usually for 13–20 weeks. But to buy unemployed people more time to find work amid the pandemic recession, Congress created a new program that offered 13 additional weeks of benefits for job seekers to draw before EB, called Pandemic Emergency Unemployment Compensation (PEUC). (Since some states offer unemployment benefits for fewer than 26 weeks, Congress also let people who exhausted all available benefits in fewer than 39 weeks make up the difference through the new program otherwise meant for self-employed workers, Pandemic Unemployment Assistance.)
However, it turns out that many people who lost their jobs as a result of the pandemic will not receive all 39 weeks of unemployment benefits. Why? Because the pandemic-specific unemployment programs expire at the end of this year. That means that anyone who began receiving benefits after March 28 will have their pandemic benefits cut off before they receive 39 weeks of benefits.
Leaders may have hoped back in March that the pandemic would subside and the unemployed would not need an extension after December. But we now know that’s not likely. Instead of “going away” as President Trump said that it would, the pandemic became worse than ever, which hurt the economy and caused even more layoffs. Over 80 percent of all initial normal unemployment claims filed during the pandemic were filed with fewer than 39 weeks to go before the end of the year. While some of those recipients are repeat claimers who might still get the full benefit, evidence from California suggests most were newly unemployed people who cannot. Republicans’ refusal to negotiate seriously with House Democrats now risks undermining the stimulus that Congress has already passed by prematurely kicking millions from pandemic unemployment programs.
Even Eligible Beneficiaries Face Hurdles to Claiming Benefit Extensions
The looming cutoff isn’t the only problem facing unemployed people. To get however much of a benefit extension they do qualify for, recipients must also run a bureaucratic gauntlet through state unemployment offices already saddled with outdated technology and unprepared for the flood of applications. The U.S. Department of Labor has told states to require beneficiaries who have exhausted their normal benefits to actively apply for PEUC benefits, rather than receiving the benefits automatically. Some states are automatically enrolling beneficiaries in the program anyway, but PPI has only identified 14 such states, while 29 states indicate beneficiaries must specifically apply for PEUC in some way (several states have not yet set up their PEUC programs, and others do not indicate on their websites how beneficiaries transition from normal benefits to PEUC). This new application is simple in some jurisdictions, but onerous in others. Jobless people in Arkansas, for example, must physically go to a state unemployment office to apply for these benefits, even though they can apply for normal benefits online.
These extra barriers could deter some recipients from getting the benefits they are entitled to. And beneficiaries who may have already survived onerous wait times to get their normal benefits may once again face delaysas states struggle to process PEUC applications. Kansas warns people transitioning from normal unemployment benefits to PEUC to expect delays in their payment, which can be brutal on cash-constrained people struggling to pay their bills.
Federal policy requires states to notify people who are likely eligible for PEUC, but many are not doing so until after a recipient exhausts their normal benefits, which risks leaving people confused as to whether they are entitled to more benefits. Although I have found no good data on how common this is, anecdotal evidence from my experience suggests the problem is real. My mother, who is furloughed, did not understand what the benefit extensions would entitle her to, and those extensions made gave her a better alternative to accepting an early retirement offer from her employer. Another close friend, who is unemployed, was planning to move to his parents’ house hundreds of miles away before he found out about PEUC through his own research. States should inform all recipients of everything they are entitled to when they begin receiving benefits (or as soon as new information becomes available) so no one makes life-changing decisions based on incomplete information.
Longer Benefits Could Support the Economy Even More Than Larger Benefits
Spending more on unemployment benefits helps more than just the recipients themselves — it helps the economy in which that money is spent. And while Congress can and should do both, extending the duration of unemployment benefits might do even more to stimulate the economy than increasing the size of benefits. This is because money put into circulation by the government only stimulates the economy if it gets spent on goods and services by those who receive it. Beneficiaries are likely to spend every dollar of a small benefit to pay for necessities, but every additional dollar is slightly less essential to maintain their standard of living. As the size of the benefits grows, recipients are more likely to save rather than spend a greater share of those benefits. Accordingly, the jobless population is more likely to spend money they receive from a benefit extension than they are a bigger weekly benefit with a similar cost.
Further, the long-term unemployed are less likely to have savings or other resources to support themselves, making it even more likely they will spend a large share of their benefit. And contrary to GOP Senator Rand Paul’s claim that said “If you give people money and you make it less painful to be in a recession we can stay in a recession longer,” research on the Great Recession found that extending benefit duration did not create a strong disincentive to work. Because people can only draw unemployment benefits if they are looking for a job, extending unemployment benefits can give recipients a vital lifeline without holding back the economic recovery.
To strengthen this safeguard for job seekers and the economy, Congress should return to the negotiating table and take three immediate actions:
Second, direct the Labor Department to let states automatically enroll beneficiaries who exhaust their normal benefits in PEUC.
Third, require states to notify all beneficiaries about the full slate of benefits available to them, with immediate updates should those benefits change.
For more information on how states say people can apply for PEUC, see below.
State, How are Normal Beneficiaries Transferred to PEUC:
PPI President Will Marshall and Ben Ritz from the Center for Funding America’s Future are joined by Congressman Don Beyer (VA-8), Vice Chair of the Joint Economic Committee, to talk about the fiscal health of the United States, the path out of the economic crisis caused by COVID-19, the role automatic stabilizers should play as America works to build a resilient recovery, and the Worker Relief and Security Act.
A resilient city is defined by “the policy-induced ability of an (urban) economy to withstand or recover from the effects of shocks.” It took many U.S. cities years to recover from the 2008 Great Recession and Wall Street meltdown. Today, the coronavirus pandemic and recession pose an even more severe test of the resilience of America’s great metropolitan hubs.
“The scale and speed of this economic collapse is without precedent in modern American history,” according to a new Brookings Institute study. “In just two months, measures to safeguard public health wiped out a decade’s worth of job gains since the Great Recession.”
The speed and strength of America’s recovery from this calamity is inextricably linked to what happens in urban centers. According to 2019 report by The United States Conference of Mayors and IHS Markit, the nation’s 10 highest-producing metro economies generated $7.2 trillion in economic value in 2018, surpassing the output of the sum of 38 US states. Their output exceeds all the nations of the world save China, and is 45% greater than that of Japan, the 3rd largest economy of the world. Twelve of the world’s 50 highest-producing economies are U.S. metropolitan areas. In 2018, the U.S. metro share of total employment increased to 88.1% as metros added 2.1 million jobs, accounting for 94% of all US job gains. Metro areas are also where our most dynamic innovation clusters are centered, particularly for digital technology, pharmaceuticals, biotech and robotics. Boston, Seattle, San Diego, San Francisco and Silicon Valley captured nine out of 10 jobs created in such industries from 2005 to 2017, according to a report by the Brookings Institution’s Metropolitan Policy Program.
Compounding today’s urban economic distress is racial unrest. Coming on top of a disease that has exacted an especially heavy toll on low-income and minority communities, the police killings of George Floyd and other African Americans have triggered protests that continue to roil U.S. cities. Metro leaders are focused not only on the new challenge of recovering from the pandemic, but many recognize they must also tackle the old problems of racial disparity and injustice.
Meanwhile, cities face an intensifying fiscal squeeze. In March 2020, local governments employed nearly 14.7 million people. Two months later that number dropped to 13.4 million with more layoffs and furloughs expected in the coming months as the virus ravages the South and West. Those job losses rippled through various crucial public services, including fire, police, teachers, and frontline healthcare workers.
As millions continue to file for unemployment benefits each week, a recent survey finds that 96 percent of U.S. cities are facing budget shortfalls due in large part to COVID-19. Nearly half report “unanticipated spending increases on top of declining revenue.” City leaders also say they face catastrophic shortfalls in all major revenue categories – 69% loss in permitting fees; 68% in other fees; 63% loss in utility fees; 61% loss in sales taxes; 38% loss in state intergovernmental aid and 35% loss of property tax revenue.
Because of balanced budget requirements, local government officials are facing brutal choices – whether to raise taxes in a recession, lay off more municipal workers, slash public services or all of the above. Without an immediate and direct infusion of fiscal relief for all municipal governments, they are certain to act as a major drag on the nation’s economic recovery.
Only Washington has the fiscal resources to step into the breach and keep both state and local governments from cratering. Without fiscal support, U.S. cities will not have the capacity to tackle high rates of joblessness, rising hunger and homelessness, and entrenched racial and social inequities.
The CARES Act Congress passed in March provided $150 billion in direct aid to state and local governments. That sounds like a big number, but it broke down into $111 billion in direct aid to states; $22.5 billion for major counties and just $5 billion for large cities with populations over 500,000. The local aid was distributed only to about 38 cities.
At this writing, Congress is debating the scope of a new stimulus bill, but Senate Republicans are balking at Democratic calls for an additional infusion of $1 trillion for state and local governments. Yet doing nothing to help state and local governments weather the pandemic, warns Moody’s Analytics, “could shave as much as 3 full percentage points from real GDP and erase about 4 million jobs.”
If we fail to throw metro regions a fiscal lifeline, local governments may be forced to explore additional revenue-generating sources such as raising taxes, fines and fees to support the essential services such as water and sewer. Without direct fiscal assistance from the federal governments, local government will be forced to initiate more layoffs or furlough more workers, and cut critical services such as fire, public safety, education, child services, aging services, meal programs and more.
America’s cities and metro regions are perched on the edge of an unprecedented economic and social calamity. All of us, whether we live in urban, suburban, exurban or small town and rural American, have a shared interest in preventing these engines of national prosperity from falling into a COVID-19 sinkhole. And we need to look beyond the present crisis, tackling structural weaknesses and inequities that put our most disadvantaged and vulnerable citizens at risk.
METRO ACTION PLAN
PPI proposes three ways for the federal government to help cities provide basic services now while also making them more resilient against future crises.
• First, PPI believes state and local aid should be based on empirical evidence of need. To that end we have developed an interactive calculator that tracks state and local revenue losses due to the pandemic recession. By our calculations based on current economic projections, state and local governments need roughly $500 billion before the end of 2021 to replace lost revenues.
• Second, we recommend that Congress take two steps to ensure that aid reaches local governments as quickly as possible. One is to require states to meet “maintenance of effort” standards to ensure a significant part of the aid is passed on expeditiously to cities. We also propose that the federal government deliver a large percentage of its aid directly to local governments in the form of “revenue replacement” grants, to enable them to suspend layoffs and avoid cuts in essential services.
• Third, we call for creation of a “Metro Recovery and Resilience Board” to take a longer-range view of urban finances and identify key investments that metro regions should make, in direct partnership with Washington, to sustain the nation’s post-Covid recovery and make local governments more resilient against future national emergencies. The Metro Board would consist of leading Mayors, major county administrators, Members of Congress,
and top officials from the Housing and Urban Development Department as well
as the White House. Its mission would be twofold: 1) To open a direct channel of communication between local and national policymakers about fiscal needs and priorities; and 2) To take a deeper dive into the long-term investment needs of America’s metro regions, with an eye toward reducing geographical inequality.
Investment in city and metro economies is integral to U.S. recovery and growth. Immediate federal aid is essential to replacing lost metro revenues, which will help local governments combat rising Covid-19 infection rates, avoid mass layoffs and maintain vital public services. But Washington and metro leaders also should forge a new partnership aimed at strengthening metro resilience over the long-term, and to enable more of the public innovations that have made local government the most effective, responsive and popular component of American federalism.
The Covid-19 pandemic and recession will leave lasting marks on many major U.S. institutions, and higher education is no exception. Last spring, as most of the economy shut down, America’s colleges and universities also closed their campuses and shifted to online, video-teaching, or some combination of the two.
The experience likely will trigger a searching debate over the relative merits of online versus classroom instruction in higher education. But it already has shown that many U.S. colleges have been resilient enough to deliver a high-quality learning experience amid an unprecedented public health emergency.
If that’s the upside, here’s the downside: Once the pandemic is behind us, there will be fewer schools to welcome students, and fewer families that can afford to send them to college.
Many of America’s colleges and universities have lived on the economic margins for a long time, able to postpone tough budget choices so long as students could get federal loans to finance the rising price of a college education. A 2016 report by Ernst & Young found, there are 800 colleges vulnerable to “critical strategic challenges” because they depend on tuition for more than 85% of their revenue. Already more than 90 colleges have closed in the last three years, according to EducationDive, and that number will likely increase dramatically because of the impact of Covid-19.
The pandemic, in short, may bring to a boil a long-simmering crisis in higher education financing caused by profligate spending and mismanagement. Tuition and fees have skyrocketed since the 1970s, increasing by 2020 percent at private nonprofit four-year schools and 285 percent at four-year public colleges and universities. Though some higher education institutions have frozen or roll-backed tuition because of the pandemic and its impact on family income and savings, many others have marched ahead with their tuition hikes.
As America recovers from the Covid-19 crisis, policymakers and educators should give high priority to fixing higher education’s broken finance model. Building a more resilient education system, where schools are less dependent on tuition to survive and better skilled in providing different modalities of learning, is the key to moving forward.
More specifically, PPI proposes the following reforms:
1. Expand opportunities for qualified applicants at leading universities by creating more high-quality online and virtual courses and degrees. Many of America’s top schools already have significant experience in offering online education (where everything is online, lectures, assignments, readings) and virtual education (remote learning typically by videoconferencing). By combining in person, online, and virtual learning, schools could expand college enrollments by 10 to 25 percent, helping to expand access to America’s best public and private schools. For example, students could take their introductory courses online or virtually, and then shift to in-person classes for their majors. Schools also could offer an online/virtual version of their bachelor’s degree in certain specialties.
2. Cut the cost of higher education. Even before the pandemic, the cost of higher education was reaching a tipping point, with total debt held by students and parents now at half a trillion dollars — more than total credit card debt in America.
Yet despite the warning signs, few schools have made progress toward controlling tuition, much less reducing it. Most university presidents have called for more government aid to students rather than subjecting their institutions to touch-minded fiscal scrutiny and finding ways to cut costs and hold down expenses.
While those who call for the federal government to provide more aid to students are well-intentioned, experience shows that opening the spigots allows colleges and universities to inflate prices even more, thereby eating up most of the additional assistance. A better approach is to use some of the almost $75 billion in direct federal spending on higher education to leverage cuts in college tuition and fees. Schools can bring down the costs of tuition, and federal and state governments should require them to do so as part of any bargain to increase aid. There are a number of ways they can do this:
Reduce Administrative Bloat. As my colleague Ben Ginsberg has noted, over the past 40 years, the growth rate in the number of administrative staff at colleges and universities has been five times that of faculty. Jobs faculty used to do, including admissions, have now become the province of a cadre of overpaid “management” staff who spend days and weeks devising new rules and procedures that stifle creativity and initiative and bloat university budgets. Schools should commit to cutting administrative expenses, including staff, travel, as well as association fees, and salaries of every school leadership position (presidents, provosts, deans, vice deans, associate deans, etc.) by five percent for the next three years.
More Teaching. Teaching loads at research universities have declined almost 50 percent in the past 30 years, according to the American Council of Trustees and Alumni. While university research is often of great societal value, teaching should be given equal if not greater consideration. After all, tuition is the main source of revenue for most colleges and universities. Over the next five years, colleges should require tenured and full-time faculty to teach one additional course per year at the median pay rate for adjuncts –$2700. According to the American Association of University Professors, there are over 52,000 tenured or non-tenured
full-time faculty in the U.S. If each agreed to teach one additional course during the next academic year at 20 students per class, the number of course slots would increase by one million.
Three-Year Degrees. Three-year degree programs are common in much of Europe, and students who graduate with bachelor’s degrees from prestigious institutions such as Oxford, Cambridge, or the London School of Economics typically do so in just three years. Transitioning to a three-year degree system would force U.S. universities to streamline their curricula and cut unnecessary degree requirements that pad educational expenses for students without enhancing the value
of their degree. Making a 3-year bachelor’s degree the norm in the United States as well could cut the cost of tuition, fees, room & board by up to 25 percent. There are a variety of ways schools could shift to three-year degrees. Schools could award course credit (not just course waivers), for Advanced Placement (for students with a score of three or higher), International Baccalaureate, and other college-level coursework completed by students in high school. Schools could also give students credits for work experience and internships even if those jobs paid wages. And universities could create accelerated bachelors/masters programs so that students could earn both degrees within five years rather than in six or seven years as is currently the case.
The coronavirus pandemic has tested our country’s capacity to adapt and improvise in the face of a nationwide quarantine of indefinite duration. So far, many of America’s colleges and universities have stepped up to the challenge by shuttering their on-campus operations and swiftly moving students to virtual education. But others, operating on the slimmest of economic margins, are unlikely to survive the pandemic recession.
To make our higher education system more resilient against future shocks of this kind, lawmakers and educators must now focus on two critical tasks. The first is refining and improving remote learning and striking the right balance between online and classroom instruction. The second is developing a new financing model for higher education, one that makes colleges more cost-effective and affordable, instead of relying on ever-growing public subsidies to chase ever-rising tuition costs.
The COVID-19 pandemic has laid bare the fragility of the United States electoral voting system. Polling places, which are often densely packed indoor spaces, represent an acute public health danger. Yet, many states do not have the infrastructure in place to adapt to this situation, and it has thrown the health of Americans and our democratic institutions into doubt.
Right from the onset of this pandemic, several individuals and organizations raised alarms that the United States’ electoral system would have to radically adapt to coronavirus. Some states took this cue and pushed back their elections to buy time to implement alternative election systems or in hopes that COVID-19 would abate. Several other states, however, did nothing. Florida, which held its Democratic primary on March 17th, experienced a 53% drop in turnout from its turnout in 2016. Illinois which held its primary on the same day, saw a 61% drop in primary turnout.
States are still lagging on providing their residents with ways to vote safely during coronavirus. According to analysis from the Brooking Institute, 32 states received a C grade or lower on their performance providing residents with the ability vote-at-home during the pandemic. Alabama, which received an F grade as of writing, requires voters to have a notary or two witnesses to complete an absentee ballot. Connecticut, which received a D grade as of writing, does not offer no-excuse absentee voting, nor does it accept COVID-19 as a permitted reason to request an absentee ballot.
There is a solution to this dilemma: universal vote-at-home. Registered voters would receive a ballot in the mail automatically, without having to file an application or request one. Unlike traditional election procedures, universal vote-at-home allows Americans to vote from the safety of their households and then to return their ballot by mail or to drop in a secure drop box. This would give Americans the opportunity to carry out their democratic responsibility without putting them in harm’s way. Yet, very few states have the infrastructure currently in place to shift their electoral system to universal vote-at-home. Neither has Congress made this a priority.
Universal vote-at-home is not a novel idea. Five states – Washington, Oregon, Utah, Hawaii and Colorado – currently have the proven capacity to conduct their elections without the need for physical polling locations. Dozens of other states have the proven capacity to allow a significant percentage of their citizens to vote-at-home, and few others have precedence for voting-at-home but only allow it in the most extreme of circumstances.
Congress should incentivize the remaining states to move to a universal vote-at-home model, not only for the upcoming election but for future elections as well. Based on estimates from the Brennan Center for Justice, the cost of expanding vote-at-home to all Americans runs from $982 million to $1.4 billion. While the short-run cost is not insignificant, research has shown that universal vote-at-home reduces the administrative costs related to running elections by 40%. This represents a long-term cost saving for states and all Americans.
Some officials and organizations have alleged that universal vote-at-home is more vulnerable to fraud than in-person voting, but the evidence does not support such claims. The decentralized nature of vote-at-home means that widespread fraud would require infiltrating the foundations of the decentralized electoral network itself, while in-person voter fraud requires only the infiltration of a singular machine or ballot box within a centralized network. The track record of states with vote-at-home proves this point: Oregon, for example, had only 10 instances of voter fraud during the 2016 Presidential election.
In other words, allowing all citizens to vote from home will make our democracy more resistant to fraud as well as more resilient against national emergencies that threaten to impede our citizens’ basic right to vote.
With the evidence stacked against them, Republicans have resorted to other lines of argument to oppose vote-at-home. Sen. McConnell argued during the CARES Act debate that the proposed $2 billion in election grants would “federalize” states’ elections. Only $400 million in election grants were included in the final bill. President Trump also weighed in, saying “Mail ballots, they cheat. OK, people cheat. Mail ballots are a very dangerous thing for this country because there are cheaters” and tweeting “…[MAIL-IN VOTING] WILL ALSO LEAD TO THE END OF OUR GREAT REPUBLICAN PARTY.” This alarmist tweet is not just anti-democratic, but wrong. In a working paper out of Stanford, a team of researchers took advantage of the staggered rollout of vote-at-home in California, Utah and Washington to show that while vote-at-home modestly improved overall election turnout, the additional turnout did not benefit any party disproportionality.
Never has it been more paramount that our democratic institutions preserve their trust between it and the American people. For a small investment – one that will likely pay off in the long-run – Congress can ensure that our elections are safe and secure not just for this November but for generations to come.
For Americans and much of the world, 2020 has been an annus horribilis. Following its outbreak in China late last year, the coronavirus has spread quickly across the main international travel and trade routes. To contain the pandemic, nations have been forced to order mass quarantines, freezing economic activity and social life. It likely will take decades to calculate the full human, economic and psychic costs of this still-unfolding global calamity.
Few countries have been spared the ravages of Covid-19, but no country has been hit harder than the United States. At this writing, coronavirus has killed more than 156,000 Americans, and infected more than 4.6 million. And with the pandemic spreading rapidly across the South, West and Midwest – 39 states report sharp increases in infections – the end is nowhere in sight.
Stay-at-home orders and social distancing have put the world’s biggest economy on life support. After shrinking by 5 percent in the first quarter of 2020, U.S. output plunged by nearly 10 percent in the second quarter. Since March, more than 42 million Americans have filed for unemployment and nearly 20 million are still out of work. As many as 40- percent of the virus-related layoffs could become permanent, according to a University of Chicago study.
Many small businesses have gone under, and millions more are treading water. “Data from credit-card processors suggest that roughly 30 percent of small businesses have shut down during the pandemic,” reports The Atlantic. And many large companies in sectors hit directly by social distancing – travel and tourism, restaurants and hotels, and brick and mortar retail – have announced layoffs and permanent workforce reductions.
The federal government has borrowed and spent prodigiously to combat the virus, put money in peoples’ pockets and keep the economy from cratering. Congress so far has passed three major relief bills and is wrestling over the scope of a fourth. Washington has spent $3 trillion and could be headed toward a staggering annual deficit of $5 trillion or more, the largest since World War II. Amid this unprecedented public health and economic crisis, an old American dilemma – racial injustice – has reared its head. The unconscionable killing of George Floyd, Breonna Taylor and other black Americans by police has triggered widespread public outrage and protests.
THE CRISIS IN U.S. DEMOCRACY
Intensifying all three of these traumatic shocks is a catastrophic failure of national leadership. In past crises, leaders of extraordinary skill and character have arisen to steer our republic through the storm. Not this time. President Donald Trump has run the ship of state aground.
As the coronavirus first appeared, he sought refuge in denial and dissembling. When that did nothing to halt the spread of the virus, he passed the buck to governors and refused to mobilize the full powers of the federal government to supply tests, masks and ventilators, and to help the states set up rigorous contact tracing systems. Learning nothing from his early blunders, Trump has continued to dismiss the severity of the virus, tout phony cures, and demand premature openings of the economy and schools.
Trump’s incompetence cost our country precious weeks when the federal government should have been taking vigorous action to contain the pandemic. The delay was deadly: Had we started social distancing and locking down on March 1 rather than March 14, 54,000 fewer Americans would have died, according to disease modelers at Columbia University.
Elections really do matter. If the United States had elected leaders as capable as those in Germany, South Korea and Japan, many fewer Americans would be getting sick and dying today. And with contact tracing, masks and selective social distancing, we could keep more of our economy up and running.
As demonstrations against police brutality and racial discrimination flare up around the country, Trump again has displayed a perverse talent for inciting social rancor and pitting Americans against each other. He has smeared protesters as “domestic terrorists” and, over the protests of Mayors and Governors, dispatched unbadged federal security guards to put down the phantom threat of mass anarchy in the streets.
Finally, with a crucial national election approaching, Trump is trying to deny Americans the right to vote safely at home. He’s falsely crying fraud to undermine public confidence in the legitimacy of our electoral system, even to the point of issuing a preposterous call to postpone the vote.
No wonder America’s nerves are frayed. At this fateful moment of intersecting crises – threatening our health, prosperity and cultural cohesion – our country is saddled with a dishonest, incompetent and malicious demagogue who specializes in creating chaos rather than solving problems. Here and abroad, the impression is growing that America is becoming a failed state.
DON’T COUNT AMERICA OUT
But that’s wrong. For all our dilemmas, America remains a resourceful and dynamic country capable of swift course corrections. Beneath our fractious politics lies a bedrock of shared belief in liberty, equality and democracy. We also draw strength from a diverse and inventive citizenry jealous of its freedoms. Time and again, this country has shown it can bounce back from adversity stronger than before. Now we have to reinvent ourselves again.
Fortunately, there is a national election this fall. The American people can fire a sham president and his cowed GOP lackeys and replace them with genuine leaders who can unite us and make our democracy work.
But new leaders also need a new vision.
The United States has received a series of extraordinary shocks in this still-young century: the dot-com bust, 9/11, the great recession and financial meltdown of 2007-8, and now coronavirus, a hobbled economy and civil strife over endemic racism.
We’ve learned the hard way that our country needs stronger economic and social shock absorbers. Our challenge isn’t just to recover from the present crisis, but to build a better, more equitable democracy that will be more resilient against future shocks no one can foresee.
Americans have made enormous sacrifices to save lives and keep our health system and economy from collapsing. Many have stood by helplessly as friends and relatives have died lonely deaths in isolation. The psychological toll also has been heavy: Research by The Society for Human Resource Management finds that one in four workers report feeling either hopeless or depressed. If U.S. leaders don’t emerge from this painful period resolved to build a more just and resilient society, this suffering and sacrifice will have been in vain.
CONFRONTING ENTRENCHED INEQUITIES
The fight against Covid-19 has not been borne equally by all Americans. Health care and emergency workers and those in “essential” industries (such as meatpacking and grocery stores) have been exposed to higher risks of falling ill. The chief victims of Covid-19, by far, are older Americans. Thus far, 43 percent of deaths have been linked to nursing homes.
The pandemic also has taken a severe toll on low-income and minority communities, where many suffer from health problems associated with poverty and discrimination. African-Americans are dying from Covid-19 at a rate nearly twice as large as their share of the population. At this writing, blacks (13 percent of the U.S. population) account for 24 percent of all deaths.
The economic pain inflicted by the pandemic also has been unevenly distributed.
The lockdown, in fact, has exposed a new class divide in America. On one side are office workers, mostly college-educated, well-paid and digitally enabled, who have been able to keep working from home, and to have food and other goods delivered to them. On the other side are low-paid service, hospitality and retail workers, who can’t work remotely. Young workers, immigrants and Hispanic workers have been hit hardest by Covid-19 job losses.
Minority-owned businesses, often smaller and more precarious, have been damaged disproportionately by the pandemic. The National Bureau of Economic Research reports that, between February and April, there was a 41 percent decrease in black business owners and a 31 percent decrease in Latinx business owners, compared to an overall decline of 22 percent.
The pandemic also has exposed serious weaknesses in our private economy. Because of offshoring and long supply chains, for example, U.S. factories were unable to supply masks, gowns, gloves and ventilators in a timely way to health care workers desperately battling the virus.
Key public sector systems, long starved of investment and entangled in red tape, also have failed to respond nimbly to the crisis. Archaic computer systems in state Unemployment Insurance offices crashed as applications surged. The Center for Disease Control and Prevention, our front-line agency against pandemics, not only sent out flawed coronavirus tests, but also allowed bureaucratic inertia to delay the production of reliable tests by private laboratories.
Tens of millions of young children and older students have lost months of early learning and classroom instruction as schools of all kinds have closed. Some K-12 school systems used virtual learning to mitigate the loss, but many either did not have that capacity or chose not to use it to avoid discriminating against low-income families without computers or internet access.
Through the free and reduced price lunch and breakfast programs, public schools also play a critical role in feeding needy children. While some schools improvised “grab and go” programs to provide meals to kids, 80 percent report serving fewer meals, and only 22 percent offered meals two days a week. School closings thus have contributed to an upsurge in hunger in poor communities, even as they interrupt all childrens’ education.
A BOLD BLUEPRINT FOR RECOVERY AND RESILIENCE
In contrast to Trump’s “let’s get back to the way things were” message, progressive leaders should offer voters this fall an ambitious vision for America’s economic and social reconstruction. In this report, PPI presents a blueprint for speeding recovery and building a more resilient society. It tackles long-festering social inequities and bolsters the capacities of business and government to perform their vital missions during future pandemics or other national emergencies. Applying what we have learned during the Covid-19 crisis, our scholars and policy experts offer radically pragmatic ideas for change:
• Spur digital manufacturing in America and shorten supply chains for essential goods.
• Launch a “national reemployment” drive to get everyone back to work as soon as conditions allow, and to make work pay.
• Drive down the exorbitant cost of medical care so that we can invest more in healthy communities.
• Create well-paid production jobs and fight climate change by making America number one in electric vehicles.
• Make the social safety net more resilient.
• Forge a new economic security bargain with gig workers.
• Install a “fiscal switch” that allows Washington to automatically stimulate during economic downturns and shrink its debts during expansions.
• Give birth to two million new businesses to replace those that have gone under during the pandemic shutdown.
• Invest in resilient cities and metro regions.
• Fix America’s broken financing model for higher education. • Create a more nimble and accountable K-12 school system.
• Democratize capital ownership and expand national service.
• Replace outdated U.S. immigration laws with a “demand-driven” policy that welcomes more willing workers.
• Make our electoral democracy more resilient by ensuring that every citizen can vote at home.
Find each report of our series, Building American Resilience, below:
This post has been updated to include additional data, as well as updating our original preliminary estimate of Microsoft’s capital expenditures to reflect their since-released 10-K report.
Given the ongoing pandemic, capital investment is more important than ever before. Hundreds of billions of dollars of investment by broadband providers enabled the U.S. Internet to respond magnificently to soaring demand when the pandemic hit. On the other hand, some of the sectors that have struggled the most—such as medical equipment and supplies and food production and processing—have suffered from a shortfall of investment.
To emphasize the importance of capital spending for wages and growth, each year the Progressive Policy Institute publishes our list of U.S. “Investment Heroes:” the companies who are investing the most in America. Currently, accounting rules do not require companies to report their U.S. capital spending separately. To fill this gap in the data, we created a methodology using publicly-available financial statements from non-financial Fortune 150 companies to identify the top companies that were investing in the United States.
Table 1 below provides the top 25 non-financial companies, ranked by U.S. capital expenditure in the latest fiscal year through June 30, 2020. Table 2 belowprovides the top 25 nonfinancial non-energy companies, ranked by U.S. capital expenditure in the latest fiscal year through June 30, 2020 (Our methodology is described in last year’s report. In particular, page 15 of that report describes adjustments made for particular companies).
We note that 10 out of the top 11 companies in Table 2 are either broadband providers or tech/ecommerce companies. Out of those ten, the broadband providers invested $52 billion in the United States in their most recent fiscal year, while the tech/ecommerce companies invested $84 billion.
Table 1. U.S. Investment Heroes: Top 25 Nonfinancial Companies by Estimated U.S. Capital Expenditure
Rank
Company
ESTIMATED 2019 U.S. CAPITAL EXPENDITURES (Millions USD)*
This past weekend a Wall Street Journal piece quoted me on ecommerce jobs:
One economist who has looked at these trends has concluded something surprising: When you include all the jobs in fulfillment, delivery, and related roles, e-commerce has created more jobs between 2007 and January 2020 than bricks-and-mortar retailers lost, says Michael Mandel, chief economic strategist at the Progressive Policy Institute, a think tank. Since January, employment in this sector has fallen, but Dr. Mandel believes that as consumer spending recovers, so will employment in this area.
I thought I would give some of the statistical backup. I calculated total jobs in brick-and-mortar plus ecommerce by adding retail trade, couriers and messengers (NAICS 492)(local delivery) and warehousing and storage (NAICS 493)(ecommerce fulfillment). This total was still rising in early 2020, before the pandemic hit, with the peak coming in January 2020.
Between December 2007, the previous business cycle peak, and January 2020, ecommerce industries created 900K more jobs than were lost in brick-and-mortar retail. We can see the total in this chart.
Total jobs went up because unpaid hours that Americans used to spend driving to the mall, parking, wandering through stores, waiting on line to pay, and driving home are now being transferred to the paid sector.
How many hours are being saved? Each year the BLS does a survey called the American Time Use Survey. It shows that average consumer shopping hours per person, excluding groceries and gasoline, fell by 27%, from roughly 144 hours per year in 2007 to roughly 105 hours per year in 2018. Presumably this decline was driven by ecommerce.
The implication: Summed over the whole U.S. population, ecommerce saved American families 10 billion hours per year in 2018.
The conclusion: More jobs for American workers, more time for American families.
Independent workers face a dilemma where they cannot currently receive benefit payments from companies without risking their independent status.
WASHINGTON, D.C. – A new report from the Progressive Policy Institute examines the possibility of creating a way to regulate platforms that would preserve the flexible nature of independent workers and the benefits to our economy at large while continuing to protect both workers and consumers. The flexibility of platforms will play a critical role in helping the U.S. labor market recover more quickly from the COVID recession.
The new report finds that companies that do business with independent workers can’t provide benefits because that would turn them into employees, an outcome that the overwhelming majority of these workers do not want. But independent workers providing benefits for themselves incur a much bigger tax burden than they would face as an employee.
Key findings from the report include:
According to a recent report from Edelman Research & Upwork, 51% of respondents said there is no amount of money where they would definitely take a traditional job;
During recessions, unemployment insurance benefits received swell far out of proportion to taxes paid in, as the federal government typically appropriates more money to beef up unemployment insurance;
One estimate from the Berkeley Research Group concluded that switching the status of app-based drivers to full-time employees would reduce the number of drivers by 80 to 90 percent in California.
The new report identifies four prongs in which there is a ‘better way’ to revamp the current system tax treatment for independent workers: straighten out the current tax code, simplify the dividing line, apply a baseline level of benefits, and implement a cafeteria style plan.
Straightening out the current tax code would require independent workers to deduct healthcare and retirement contributions from the earnings calculation for the self-employment tax. In order to simplify the dividing line, an independent worker would have to reach a certain number of hours contracting with a particular company or platform, then the worker would be entitled to a required set of tax-advantaged benefits.
To apply a baseline level of benefits, companies would be able to offer benefits to independent contractors without worrying that they would be reclassified as employees at either the state or federal level. The cafeteria plan would allow independent workers to choose from a variety of pre-tax benefits, including health insurance, paid time off, and retirement savings.
Policy recommendations include:
Construct a new regulatory framework that explicitly recognizes a middle ground of independent workers who can receive benefits from the (multiple) companies they contract with;
Straighten out the tax treatment of benefits so that independent workers are on a level playing field with employees;
Require a baseline level of benefits and protections for independent workers, including a cafeteria style plan;
Install a uniform national standard for determining who is an independent worker.
“A separate and important question is whether the new regulatory regime would be opt-in or mandatory,” said author Michael Mandel, the chief economic strategist at PPI. “If companies do not opt in, they would remain subject to existing legal tests for determining worker classification.”
One of the biggest productivity advances in recent years has been the use of platforms to connect buyers and sellers at lower cost. Platforms offer less rigid contractual arrangements, expanded earnings opportunities for workers and access to essential goods and services for underserved communities. Overall, platforms generate win-win economic activity which benefits everyone.
The flexibility of platforms will play a critical role in helping the U.S. labor market recover more quickly from the Covid recession. In most economic recoveries, companies have been apprehensive about making the commitment to hire given lingering economic uncertainty. That has typically made employment a lagging indicator in recoveries. By contrast, platforms will make it easier for workers to scale up hours worked gradually as the economy expands, which will boost consumer spending and demand, which will in turn boost employment.
The big question, though, is how to regulate platforms in a way that preserves the flexible nature of the work and the benefits to our economy at large, while continuing to protect both workers and consumers. The Progressive Policy Institute believes strongly in the importance of regulation for a well-functioning market economy. Yet we have long advocated for “regulatory improvement” as essential for accelerating growth and job creation.
Regulatory improvement is very different from deregulation. Too many sectors of the economy have overlapping and contradictory layers of regulation that get in the way of productivity gains and rising incomes. At the same time, there may be parts of the economy where new rules are necessary. In this case, platform businesses need to step up and provide a baseline level of benefits to their workers.
The labor market, in particular, is struggling with a 20th century regulatory framework imposed on a 21st century economic structure. The first 1099 was issued in 1918 and the first W-2 in 1944. To this day the labor market is artificially divided into “employees” and “independent workers”, including freelancers, sole proprietors and other self-employed workers. The dividing line is quite complicated and, in some cases, almost impossible to understand, with different federal and state agencies following different rules for establishing the dividing line. This patchwork of conflicting regulations creates enormous business uncertainty, reducing the incentive to create new work opportunities.
In the current regulatory framework, workers classified as “employees” are subject to a completely different regulatory regime than independent workers, including rules for scheduling and hours worked, working conditions, minimum wages and who pays Social Security and Medicare taxes. Employees are subject to employers’ control in every aspect of how they do the job, which for many low-income workers means shift work tied to a single company, which sets the exact hours. Employees typically get certain benefits, such as workers compensation and unemployment insurance, which are generally paid for by payroll taxes, and possibly access to other benefits, such as group life insurance, defined contribution retirement plans, and employer-sponsored health insurance or health savings accounts (HSAs).
Independent workers have a unique flexibility that employees do not enjoy at all. In the same survey, 51% of respondents said there is no amount of money where they would definitely take a traditional job. Part of the explanation may be that independent contractors simply aren’t able to work under the terms of normal employment; in fact, 46% say they could not have a traditional job due to personal circumstances (e.g., health or caregiving duties).
But in exchange, independent workers, almost by definition, are not allowed to get benefits from the companies that they do business with. As an IRS publication states:
Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.
Unfortunately, the current tax system systematically penalizes independent workers who try to provide their own benefits and companies that want to help these workers maintain flexibility while accruing appropriate benefits or protections. For example, as we explain below, most independent workers have to pay FICA taxes on the money they contribute to their tax-deferred Individual Retirement Accounts (IRA), Simplified Employee Pensions (SEP) or solo 401k accounts. By comparison, the contribution of employers to employee retirement accounts is exempt from both employer and employee FICA taxes. This saving can be worth thousands of dollars. The same or similar problems show up with other benefits as well.
This puts independent workers into a catch-22 situation. The companies that they do business with can’t provide benefits because that would turn them into employees, an outcome that the overwhelming majority of these workers do not want. But independent workers providing benefits for themselves incur a much bigger tax burden than they would face as an employee.
There are two solutions to this problem for independent workers. One is to double down on the historical dichotomy between employees and independent workers and make the distinction even more rigid. This “Procrustean Bed” solution is best exemplified by which imposes rigid tests on who can be classified as an independent contractor. Basically, it forces companies to turn many of their independent contractors into employees, which would lead to the loss of these workers’ flexibility and control over their hours and who they can work for. In the gig economy space, this would almost certainly mean set schedules and the inability to work on more than one platform. Minimum wage rules and other employment regulations would lead to reduced service at certain times of day or in certain geographical areas.
The other alternative is to improve the position of independent workers by creating a new regulatory regime that extends them important new benefits, while still allowing the flexibility that self-employed workers choose.
This new regulatory regime would have several important features.
It would straighten out the tax treatment of benefits so that independent workers are on a level playing field with employees.
It would require a baseline level of benefits and protections for independent workers, including a cafeteria style plan with a menu of options for workers to choose what makes the most sense for them.
It would have a uniform national standard for determining who is an independent worker. One possibility is that companies would have no control over hours of work, and no non-compete agreements.
A separate and important question is whether the new regulatory regime would be opt-in or mandatory. We lean towards opt-in, as discussed below.
The Structure of Benefits
What benefits are U.S. employers actually paying to their employees? Table 1 below summarizes the distribution of benefits for full-time and part-time workers for the 2018-2019 period, based on BLS data. Note that part-time workers get a significantly small share of their compensation in benefits compared to full-time workers. Moreover, almost half of the benefit “package” for part-time employees comes through the legally mandated “benefits” such as employer tax payments for Social Security and Medicare, much of which independent workers already pay on their own.
In general there are two problems with independent workers providing their own benefits. First, as we will see, the tax laws are written in such a way as to be biased against independent workers compared to employees, especially when the independent workers file on Schedule C. Second, if the businesses hiring the independent workers try to provide benefits, that’s taken as prima facie evidence that the independent workers are really employees, which the overwhelming majority of self-employed workers typically do not desire to be.
Example 1: Retirement Savings
We already mentioned that the current tax system systematically penalizes independent workers who try to provide their own benefits. Let’s begin with retirement. Suppose that an employer wants to contribute $1000 to an employee retirement plan such as a 401k. That employer contribution is deductible from the employer’s business income and does not incur Social Security or Medicare Taxes for either the employer or the employee, as long as certain rules are met.
Now suppose a company gives that $1000 to an independent worker who is filing as a Schedule C sole proprietor or single-person LLC. They deposit the $1000 in their IRA, SEP, or solo 401k account as a tax-deferred retirement contribution. The independent worker gets to deduct this contribution from their federal income tax (line 15 or line 19 on schedule 1).
However, the independent worker has to pay both the employee and employer FICA tax, minus the net impact of the deductibility of the employer share (Schedule SE and line 14 on schedule
1). So, for example, if the independent worker’s marginal federal income tax rate is 22%, they end up paying a bit under 13% on the $1000, rather than 0%.
In other words, the independent worker is penalized on the retirement savings side. And the company can’t offer to bring the independent worker into the company’s plan without classifying the worker as an employee.
Example 2: Healthcare Benefits
A similar disparity holds in the case of healthcare benefits. If an employer contributes $1000 to a health insurance plan for their employee, that contribution is deductible from the employer’s business income and exempt from both employer and employee FICA taxes (within limits). And the contribution does not count towards the employee’s taxable income.
That same $1000, paid directly to the independent worker, can also be used to finance health insurance. In many circumstances, that spending on self-employed health insurance can be deducted from taxable income (Line 16 on schedule 1). However, the independent worker still must pay employer and employee FICA taxes on that $1000, minus the deductibility of the employer share. As before, if the independent worker’s marginal federal income tax rate is 22%, they end up paying just under 13% on the $1000, rather than 0%.
Example 3: Workers’ Compensation
Workers compensation is basically an insurance policy that covers employees for on-the-job accidents or injuries. Workers comp benefits are typically not taxable, and workers comp premiums are deductible from business income. Depending on the particular state, independent workers with no employees are usually not required to purchase workers’ comp for themselves. Such individual policies can be quite expensive, so many independent workers go without. But going without workers comp or occupational accident insurance, runs the risk of being exposed to large medical bills and a significant loss of income if workers are injured on the job. On the other hand, if the company provides worker compensation to an independent worker, that runs the risk of having them reclassified as an employee, which is not the outcome self-employed workers want.
Example 4: Unemployment Insurance
Under ordinary circumstances, the U.S. unemployment insurance system is a fairly small part of benefits. Depending on the year, average state and federal premiums for unemployment in the private sector amounts to between 0.5% and 0.9% of compensation. In 2018—a low-unemployment year–that came to only about $40 billion, on an annual basis. By contrast, unemployment benefits received in 2018 came to only $27 billion. Unemployment insurance premiums are deductible from business income, while unemployment benefits are subject to income taxes but not to FICA taxes.
On the other hand, during recessions, unemployment insurance benefits received swell far out of proportion to taxes paid in, as the federal government typically appropriates more money to beef up unemployment insurance. In 2009 and 2010, for example, unemployment benefits rose to over $130 billion annually. Because of these special payments, unemployment benefits paid out over this last business cycle (2008-2019) exceeded unemployment insurance taxes paid in by more than $100 billion, none of which went to independent workers.
However, the discussion around unemployment insurance for independent workers is different now than it would have been even six months ago. The Pandemic Unemployment Assistance (PUA) covered self-employed workers and small businesses, and showed that it was possible to provide “income insurance” for independent workers in hard times outside of the conventional unemployment insurance structure.
So let’s focus for now on how to provide “income insurance” for independent workers in normal, non-recession circumstances.The key is that independent workers need a cushion not just against economic shocks, but personal shocks such as illness or family needs. One solution is for employers to contribute to a pot of money for the independent worker that could be used for a variety of different purposes. Like unemployment insurance premiums, the contributions to the fund should be tax-deductible.
One variant of income insurance that could apply to independent workers is income averaging for tax purposes. Because of the progressivity of the income tax code, allowing independent workers and employees to average between good years and bad years could significantly reduce the average tax bill, and cushion the effects of fluctuations. Income averaging was available to taxpayers whose income spiked up until 1986, when it was eliminated by that year’s tax reform (it is still available to farmers and fishermen).
The Wrong Approach
The key goal is to make independent workers better off. One potential solution, as noted in the introduction, is to double down on the historical dichotomy between independent workers and employees. California, which went into effect on January 1, 2020, is the exemplar of this approach. This codifies and expands the “ABC test” which says that a worker is an employee unless they meet all of the following conditions: (A) “the individual is free from direction and control,” applicable both “under his contract for the performance of service and in fact,” (B) “the service is performed outside the usual course of business of the employer,” and (C) the “individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.”
Under this extremely stringent test, some independent workers would need to be reclassified as employees. This reclassification is incompatible with business models predicated on independent workers, and as a result, many businesses have cut ties with California-based workers or shut down operations in California entirely. Under the new classification, it’s not illegal per se to allow an employee to completely decide which work opportunities to accept and to set his or her own days and hours (without any intervention from the business), but it’s certainly doesn’t fit the way employers typically operate.
As a response to this new law, California independent workers have been laid off en masse. In its news coverage of the passage of AB-5, Vox published an article with the headline “Gig workers’ win in California is a victory for workers everywhere.” Its reaction as a business, however, was quite different. A couple months later, the parent company Vox Media laid off 200 freelance writers right before the holidays (and right before the law went into effect on January 1). Deliv, a Menlo Park-based crowdsourced, crowd-shipping, same-day delivery startup, severed its relationship with 591 drivers a few months after it went into effect. 7-Eleven halted new California franchises. One estimate from the Berkeley Research Group concluded that switching the status of app-based drivers to full-time employees would reduce the number of drivers by 80 to 90 percent in California.
A Better Way
An alternative is to construct a new regulatory framework that explicitly recognizes a middle ground of independent workers who can receive benefits from the (multiple) companies they contract with.
As we noted above, would have to address three main issues.
It would straighten out the tax treatment of benefits so that independent workers are on a level playing field with employees.
It would require a baseline level of benefits and protections for independent workers, including a cafeteria style plan.
It would have a uniform national standard for determining who is an independent worker. One possibility is that companies would have no control over hours of work, and no non-compete agreements.
A separate and important question is whether the new regulatory regime would be opt-in or mandatory. We lean towards opt-in given the wide variety of independent contractor arrangements that exist (e.g., doctors, realtors, etc.). If companies do not opt in, they would remain subject to existing legal tests for determining worker classification.
Note that our proposal is very different from the “marketplace contractor” laws passed in states such as Florida. Such laws merely specify that certain on-demand workers are to be treated as independent contractors. However, they do not fix the federal tax laws that unfairly penalize benefits for independent workers. They also do not specify baseline levels of benefits and protections.
Straightening out the tax code
As documented in this paper, the current tax treatment of benefits systematically favors employees over independent workers. Sole proprietors and single-member LLCs that file via Schedule C pay a substantial tax penalty for attempting to access the same benefits employees get. That needs to be fixed. For example, when a self-employed worker contributes to an SEP, that contribution should be exempt from payroll taxes. The tax fix here would be a simple one, allowing independent workers to deduct healthcare and retirement contributions from the earnings calculation for the self-employment tax.
The companies need to step up here, too. A company should be able to contribute to an independent worker’s retirement or health accounts without triggering additional tax consequences, just as would happen for an employee. This would require a modification to current law governing benefits.
Simplifying the dividing line
The dividing line between independent workers and employees should include whether the company contributes to benefits for the independent worker. To the contrary, in this new category, once a worker reached a certain number of hours contracting with a particular company or platform, the worker would be entitled to a required set of tax-advantaged benefits —for example, portable benefits including paid leave, retirement savings accounts and contributions towards an individual’s health insurance premiums. All workers should be covered by occupational accident insurance for on-the-job injuries. On the other hand, companies would be forced to allow workers in this third category the freedom to choose their hours as well as work for other companies in the same industry. In other words, control over hours or non-compete agreements.
Baseline level of benefits
The exact level of benefits required in the new category would have to be considered carefully. The optimal mix of benefits will create an option that is preferable to current rules for many companies and workers, creating a win-win proposition. The flexibility, in particular, will be attractive to many workers.
We note that it’s especially important to design the benefits package to help low wage workers. For example, one could imagine zero-cost banking as part of the package in order to link the unbanked to the financial system. These zero-cost bank accounts would be designed to be portable and would be subsidized by the companies with which the worker contracts.
Companies would be required to choose, on a year by year basis, whether they treat their independent contractors under this new category. This choice would allow companies to offer benefits to independent contractors without worrying that they would be reclassified as employees at either the state or federal level, while preserving the flexibility and independence that are synonymous with independent contractor status. And independent contractors would be on a level playing field with the tax-advantaged employee benefits.
How the cafeteria style plan would work
The cafeteria plan would allow independent workers to choose from a variety of pre-tax benefits, including health insurance, paid time off, and retirement savings. These benefits would be tied to the individual, not the job, making them truly portable. Plans would be managed by a qualified benefits provider. If an independent contractor ceases work for one company, they do not lose any accrued benefits from that relationship. Companies pay the equivalent of a certain share of the worker’s earnings into a dedicated account for pre-tax benefits. There is no required match from the beneficiary – the cost is fully borne by the business and nothing comes out of workers’ pockets. The independent contractor accrues benefits in proportion to the amount of money earned on the platform.
Independent workers can choose to use these funds towards individual health insurance premiums. They can also choose to add the money toward paid leave or retirement. Individuals access the paid leave benefits by self-certifying that they have experienced a qualifying event, such as falling sick, needing to take care of a family member, or living under a state of emergency. Since there is no separation event for an independent contractor similar to an employee being laid off an employer, there needs to be a cutoff when this short-term insurance plan converts into a cash benefit. For example, at the end of the year, the unused benefit funds could be rolled into a retirement savings account.
In order to prevent a patchwork of state and local laws from developing, the new federal law needs to include preemption. This new regulatory model — in particular the social insurance component — is critical to solving market failures. To take one illustrative example, consider the negative externalities created during a pandemic. In the case of a contagious disease, one individual’s actions (such as wearing a mask) directly affect the likelihood of others getting infected. Similarly, there is a public interest in ensuring independent contractors aren’t financially pressured to work when they’re feeling sick. The government needs to create a new regulatory framework that incentivizes private sector companies to fund benefits programs such as sick leave or paid leave to reduce the recurrent negative spillovers in labor markets.
Cost
Obviously this new regulatory regime extends certain tax breaks now enjoyed by employees to independent workers as well, which incurs some hit to tax revenues. But note that the alternative solution to the independent contractor problem—redefining the dividing line so that more independent workers are reclassified as employees—also incurs a hit to tax revenues. Reclassification of independent workers as employees costs the federal government FICA tax revenues on employer contributions to healthcare and retirement plans. In addition, reclassification significantly reduces the amount of work (and therefore the amount of taxable worker pay) overall.
Consider, for example, business payments for health insurance. As we saw earlier, for independent contractors who file a Schedule C, those health insurance payments can be typically deducted from taxable income, but not from the payroll tax base. By contrast, business payments for health insurance for employees are not subject to the payroll tax. So, legislation that forces independent workers into employee status ends up reducing payroll tax revenues, all other things being equal. This would reduce the public funds available for vital social insurance programs.
This is not a final answer on the cost question, of course. But it does mean to get a good cost estimate, it’s necessary to compare apples to apples. Critically, businesses should incur the full cost of participating in the new framework we are proposing.
Conclusion
Independent workers face a dilemma where they cannot currently receive benefit payments from companies without risking their independent status. Meanwhile, they cannot provide benefits for themselves without being unfairly penalized by the tax code relative to employees.
Previous attempts at the state level to define a new category of “marketplace contractors” has not fixed this dilemma, because they did not address disparities in the tax treatment of benefits. Nor did they create a baseline benefit package that companies must provide.
We suggest that it is possible to design a new regulatory regime that is a win-win proposition. It makes independent workers better off by making it easier for them to either get benefits from a company or provide the benefits for themselves, while still retaining the flexibility that is an essential attraction of independent work for most. At the same time, by allowing companies to opt into this new regulatory regime, it ensures that companies have an alternative to a patchwork of state regulations if they are willing to offer a baseline package of benefits.