Covid-19 has taught employers the surprising lesson that for many more positions than expected, remote work is preferred by workers and seems to have little negative impact on workplace productivity. Within the federal government, a September poll showed that 53 percent of remote federal employees agreed they could perform their duties with minimal or no disruption and a November survey of managers at the Department of Transportation found 55 percent of units were more productive during the pandemic than before.
A more distributed federal government would likely raise real worker wages, improve recruiting, and lower the government’s overall operating costs. But the federal government has several additional reasons to prefer a more distributed workforce.
By allowing jobs to be performed by people who do not live in DC, a more distributed workforce can combat the trend of ever widening geographic inequality. Compared to policies like the relocation of federal agencies, it is more incremental, less political, spreads jobs to more areas, and will likely result in far less employee attrition.
Remote work brings the federal government closer to the governed, advancing the goal of recruiting a workforce drawn from all segments of society.
Property prices in DC have increasingly pulled away from national levels, but the federal presence in DC is large enough that a more distributed workforce could lead to meaningful downward pressure on residential and office rental prices in the city, benefiting residential and business renters who do not relocate.
“The Biden Administration has a unique opportunity to help distribute the federal bureaucracy across the U.S. and thereby empower workers, improve hiring, and promote regional economic development. This natural experiment over the past year has shown that for more workers than previously anticipated, working remotely can be just as effective and has unexpected benefits. Moving to a model where even 20% of the federal workforce is distributed would be a significant change. The U.S. government has aspired to achieve a workforce from all segments of society and by embracing remote work, where appropriate, we can bring that closer to reality.”
The Biden administration has a unique and largely undiscussed opportunity. Prior to Covid-19, 5 percent of the U.S. workforce primarily worked from home. During the pandemic, this share rose as high as 50 percent; as of November, 36 percent of federal workers were still working remotely. With vaccines already beginning to roll out, this temporary arrangement is likely to end during the Biden administration. The government will face a choice between making what has been a temporary experiment permanent or returning to the status quo ante and bringing everyone back to the office. We believe the latter would be a mistake.
Covid-19 has taught employers the surprising lesson that for many more positions than expected, remote work is preferred by workers and seems to have little negative impact on workplace productivity. Within the federal government, a September poll showed that 53 percent of remote federal employees agreed they could perform their duties with minimal or no disruption and a November survey of managers at the Department of Transportation found 55 percent of units were more productive during the pandemic than before. Full-time remote work also decouples where workers live and work, allowing firms to employ workers from anywhere. Hiring from outside of expensive urban centers tends to lower costs and expands the pool of applicants from which an organization can hire. For these reasons, surveys indicate private companies anticipate a dramatic expansion of permanent remote work relative to before Covid-19.
The federal government should follow suit and give current workers the choice to continue to work remotely full-time if they were able to function well during the crisis. Going forward, the government should start with the assumption that new positions will offer workers the same choice, opening up federal positions to people living anywhere in the country. While not every position can be performed remotely, a large fraction of the 36 percent currently being done remotely can.
A more distributed federal government would likely raise real worker wages, improve recruiting, and lower the government’s overall operating costs. But the federal government has several additional reasons to prefer a more distributed workforce.
By allowing jobs to be performed by people who do not live in DC, a more distributed workforce can combat the trend of ever widening geographic inequality. Compared to policies like the relocation of federal agencies, it is more incremental, less political, spreads jobs to more areas, and will likely result in far less employee attrition.
Remote work brings the federal government closer to the governed, advancing the goal of recruiting a workforce drawn from all segments of society.
Property prices in DC have increasingly pulled away from national levels, but the federal presence in DC is large enough that a more distributed workforce could lead to meaningful downward pressure on residential and office rental prices in the city, benefiting residential and business renters who do not relocate.
With the end of the pandemic finally in sight, now is the time to move to a more distributed workforce. It will never be easier than it is now to reorganize the federal bureaucracy into a more decentralized model. Managed well, all these goals can be advanced without sacrificing the quality of federal government service.
A Historic Opportunity
This is a unique opportunity to reorganize the large federal bureaucracy. Moving from a co-located to a distributed labor force presents significant challenges for any organization: new technology must be acquired and allocated, processes rethought and rewritten, and employees trained to use new technology and follow new procedures. Even then, there will be uncertainty: what problems are unforeseen and will need to be solved? Will they be solvable? And looming above it all is a bias towards the status quo (don’t fix what isn’t broken). For all these reasons, firms have historically been hesitant to pivot to remote work, even when it was technically feasible.
But due to the Covid-19 global pandemic, many of these sources of friction have been overcome. Organizations that can operate remotely are likely to have more than a year’s experience doing so by the time they can safely bring workers back into the office. Technology has been acquired and allocated, processes have been changed, and workers have learned to use their new tools and procedures. Uncertainty is resolving and with practice organizations are getting better — not worse — at working remotely. Perhaps most importantly, remote work is now the status quo for much of the federal government.
Reinforcing this rationale is the unusually large employee turnover that is expected to occur during the Biden administration due to the retirement of the baby boomers. In 2018, just 14 percent of federal employees were eligible to retire, but this number is expected to rise to 30 percent by 2023. NASA, HUD, the Treasury, and the EPA are all forecast to have more than 40 percent of employees eligible for retirement by 2023.
This presents an unusual opportunity to reorient the federal workforce towards workers who prefer remote work. One potential challenge to a more distributed federal workforce is that federal workers may believe career advancement is more difficult for remote workers if senior managers have a preference for co-location. Indeed, in pre-Covid surveys, older workers do tend to be less interested in remote work than young ones. When this is the case, remote work may become unattractive to the most ambitious (young) workers, which can undermine the successful transition of an organization to remote work. Fortunately, the retirement wave presents an opportunity to give the federal government a large infusion of workers who are comfortable with managing and working remotely, which should help mitigate these concerns.
The Benefits of Decentralization
Allowing more remote and distributed federal work has several advantages.
Morale and Real Wages
Workers like remote work. As described in detail in another report, remote work is valued by workers for a variety of reasons. The freedom to work from anywhere allows workers to move to be closer to friends and family or to where they can live in their preferred lifestyle. Remote work also eliminates commuting time, tends to reduce meetings and distractions, and frequently increases schedule flexibility. In a pre-Covid study workers were willing to accept wages that were 8 percent lower in exchange for the opportunity to work remotely; another showed that remote work significantly reduced employee turnover.
In the era of Covid-19, greater experience with remote work has done little to dampen enthusiasm for it. Overall, 76.1 percent of workers who can work from home say they want to do so at least a day a week when the pandemic is over, and 27.3 percent want to be fully remote. Among tech workers, the desire to be remote is even higher: a November survey found that 95 percent with the option to work remotely permanently would choose to work remotely on a permanent basis, and that 6 in 10 would take a pay cut to work remotely. Giving federal workers the option to work fully remotely is a cost-effective way to raise employee morale.
Remote work’s most salient benefit for federal workers may be its potential impact on the real wage of federal workers (i.e., the wage relative to their cost of living). A plurality of federal workers live in and around Washington, D.C., where the cost of living has diverged from the national average at an increasing rate. BEA data shows the overall cost of living in the DC metro area was 17.4 percent higher than the average for the U.S. in 2019. This difference is largely driven by significantly higher housing costs, which Census data show has increasingly pulled ahead of the rest of the country over the last two decades.
By allowing federal workers to relocate from the Washington metro region to areas with a lower cost of living, federal workers in Washington, D.C. can benefit from an increase in their real wage (that is, their wage relative to cost of living). Given the BEA’s estimate, D.C.-based federal employees can enjoy the equivalent of a 17.4 percent reduction in living expenses by moving to a region with a nationally representative cost of living.
This benefit, of course, depends on how much pay is adjusted for remote workers. In principle, the federal government could allow workers to retain their original pay, regardless of their location, or it can adjust pay to reflect local cost of living (as is current federal policy for full-time telework). The maximum benefit to federal workers would allow workers to retain their original salary, while the maximum savings to government would adjust pay to reflect cost of living.
It is important to note that D.C.-based federal workers could very well see their real wages rise if they relocate, even under the current system of locality-based pay. Federal workers are typically paid according to the general schedule, which includes locality pay adjustments based on the prevailing local wages for non-federal employees. For the year 2021, the location pay adjustment for the Washington, D.C. metro area was 30.5 percent, as compared to the lowest locality adjustment of 16.0 percent for “rest of the United States.” Thus, in general, a worker relocating to a place with nationally representative prices would see their cost of living decline by 17.4 percent according to BEA data, but would see their wages reduced at most by 14.5 percent.
This understates the potential gains from relocation, since the places with the lowest locality pay have lower than average costs of living. To take one example, the location pay adjustment for Des Moines, Iowa (where one of the authors of this report resides) is also 16.0 percent. A federal worker relocating from Washington, D.C. to Des Moines would see their salary reduced by 14.5 percent, but would see their cost of living fall by nearly twice as much (27.2 percent).
An alternative approach would be to default to the current system of locality wages in the new location while retaining the option for agencies to hire using the D.C adjusted pay scale on a case-by-case basis. Doing so would essentially allow agencies a 17.4 percent average increase in the real wage they could afford to pay under the General Schedule pay scale. This would enable the federal government to attract more qualified candidates than would ordinarily be the case.
Not everyone prefers remote work, but there is no reason the federal government cannot provide office space in D.C. for workers who prefer it. One of the main advantages of remote work is greater choice and autonomy for workers, including the choice to work in a traditional office environment. Others will prefer a hybrid arrangement, enjoying a less frequent commute into the office (as was already the norm for much of the federal workforce prior to Covid-19). Moreover, even federal workers who do not work remotely will likely benefit from a more remote friendly policy. In San Francisco, an exodus of tech workers due to the option to work remotely led to a 27 percent drop in real rental prices over the year. Downward pressure on rental prices in the D.C. area would also serve to raise the real wages of federal employees who are unable to relocate to areas with a cheaper cost of living. It could also reduce congestion and commuting times for D.C. residents. This is important since, as we discuss later, the majority of federal positions will probably remain co-located for the foreseeable future.
Lower Costs
Whether the government ultimately chooses to adjust pay based on locality, remote work will allow the work of the federal bureaucracy to be done at lower cost. Renting office space in Washington, DC is expensive. According to Moody’s Analytics, office space is 41.6 percent above average for the U.S., making the D.C. metro area the 7th most expensive in the country. The US Patent and Trademark Office, which already has a work-from-anywhere program for patent examiners, estimated remote work saved it $52.1mn on reduced office space requirements in 2019 alone. And just as workers unable to relocate from D.C. may benefit from lower property prices if a significant portion of D.C. workers relocate, D.C. based agencies may benefit from lower prices for office space due to reduced local demand.
Office space isn’t the only source of savings. Increased worker morale due to remote work has been found to reduce employee turnover in some settings. The USPTO estimated that increased retention accounted for $23mn in savings over 2019.
As noted above, a more distributed federal government could also choose to save money by adjusting pay by locality. To estimate the potential savings if some portion of D.C.-based federal workers relocated, we use data on 1.5 million federal government employees from U.S. Census data from 1980 through 2019 to estimate the DC pay premium with regression analysis. The results show that (conditional on age and time varying education premiums) the relative cost of employing workers in DC has gone from around 6 – 7 percent in the 1980s and 1990s, to 10 percent in the early 2000s, to around 22 percent in the most recent years, relative to federal workers in the rest of the country.
A Larger Labor Market
Remote capabilities can also improve government quality by facilitating access to the best job candidates in the nation, rather than the best in the local job market. Thus, even if a given worker is slightly less productive when working remotely than in an office (and they probably are not, as discussed later), this disadvantage can be more than outweighed by the benefits of access to a larger labor market. As an illustration, suppose it’s a bit harder to do some job remotely; any particular worker is 5 percent less productive performing their job remotely than they would be in an office. Since the remote job is open to anyone in the country, if that lets the government hire a worker who is 6 percent more productive than could be had locally, this will more than offset the decreased productivity of doing the job remotely.
These issues are particularly salient to the federal government.
First, relative to the nation as a whole, the federal government is unusually suited to remote work. As indicated in the figure below, the share of federal workers who are working remotely has persistently been 15 percentage points higher than the national average of all workers.
Importantly, the estimates above are likely to be conservatively low, since BLS estimates only refer to working remotely due to the pandemic and exclude those who were already remote. In addition, otherestimates find significantly higher rates of overall remote working than the BLS, suggesting it is on the conservative end of the spectrum.
To get a better sense of the kinds of federal positions that can be done remotely, we can turn to the current population survey, which has asked employees if they are working remotely due to the pandemic since May. Over September, October, and November 2020, federal government position types with more than 30 percent remote workers are displayed below.
Note: From 2020 CPS, limited to cells with a sample size of 100 responses or more.
Note that many of these position types require high levels of skills, education, or experience, which can make hiring challenging. This is important given the anticipated spike in retirement eligibility during the Biden administration as the baby boomers retire. Making the federal bureaucracy remote will facilitate filling these vacancies quickly with the best candidates in the country. Moreover, given the move to remote work by much of the private sector (one survey found 22 percent of US workdays will be remote even after the pandemic subsides), the US government will be at a significant hiring disadvantage if it insists workers relocate to accept positions and other organizations do not.
Finally, it’s worth considering new types of talent that wouldn’t previously have considered working for the federal government that would be open to public service under a permanent remote work arrangement. In particular, the federal government has struggled to increase its technical capacity with many workers earning higher salaries at firms like Google, Facebook, and Microsoft than are possible working under the General Schedule pay scale. To combat this, the federal government has attempted to increase the frequency of technical “tours of duty” that tech workers can undertake. However, take-up has remained low, with one reason being the difficulty of relocating to D.C. for a temporary fellowship. But if these workers could work remotely, opportunities within federal agencies will become more attractive.
Geographically Dispersed Workforce
A geographically dispersed workforce has several other advantages for the federal government. The first principal of the US Merit System is (emphasis added):
Recruitment should be from qualified individuals from appropriate sources in an endeavor to achieve a work force from all segments of society, and selection and advancement should be determined solely on the basis of relative ability, knowledge and skills, after fair and open competition which assures that all receive equal opportunity.
By removing relocation barriers to employment, more opportunities to work from anywhere would contribute to a more geographically representative workforce. These barriers can be significant, even when the monetary cost of relocation to D.C. is covered by the employers. A 2020 study found the typical U.S. adult would need to be paid an additional $24,000 (43 percent of the typical salary) to relocate to a job that took them away from friends and family.
Otherstudies have highlighted the importance of informal ties and social networks for finding jobs. Clustering federal jobs in a small number of locations means the social networks of government workers are geographically constrained, contributing to an information gap about job openings, the desirability of different positions, the kinds of experiences that would be valued, and so on, outside major federal clusters. Over time, a dispersed workforce would help erode these information gaps.
More speculatively, a geographically dispersed workforce could help rebuild trust in government, which has been nearing historic lows. Working from home during the Covid-19 pandemic has been associated with a 31 percent increase in white collar crime tips to the Securities and Exchange Commission, which may have been caused by a more arms-length and professional relationship between coworkers. A dispersed workforce may also be harder to improperly influence for similar reasons (it is harder to convince someone to bend the rules over email than dinner and drinks). Lastly, it is worth noting that historically, Americans have trusted their local government more than their state government, and their state government more than the federal government. No doubt this is partially due to the social and physical distance between the local, state and federal governments and the governed.
Economic Development
Finally, remote work could be a new tool for economic development in regions that are being increasingly left behind by the rising importance of agglomeration effects. The increased importance of agglomeration effects over the last several decades have led to economic prosperity for cities and economic decline in rural areas. This is one of the root causes of the serious political and social challenges we face today. A variety of policies have been suggested to revitalize or at least slow the decline of lagging US regions, including proposalstorelocateseveral federal agencies outside of Washington, D.C. The purpose of relocation is to move jobs to regions with shrinking economies (and tax bases). These are not just the jobs of the workers in federal agencies, but also workers in related fields who work with the agencies (lawyers, lobbyists, etc.), and workers who provide services to high-paid government workers (barbers, restaurant workers, IT personnel, etc.).
Dispersing the federal bureaucracy is a much easier way to gain the benefits of economic development that is relocation’s goal.
It would distribute the gains of relocation more widely, including to rural areas, rather than concentrating them in a handful of expensive, urban cities.
It would allow more jobs to be moved out of Washington. Agencies that do not need to be physically present in Washington could go remote. But, even more workers from agencies that cannot relocate could also go remote, as long as their specific position does not require physical proximity.
It would be far less politically contentious than deciding centrally where to relocate entire agencies. Instead, workers would have the choice on if and where to relocate.
It would avoid the attrition and disruption that typically accompanies relocation. For example, the relocation of the USDA Economic Research Service to Kansas City led to the loss of at least half the staff (and up to 93 percent) as workers declined to move.
Moves could be implemented incrementally, one open position at a time.
It would be cheaper and logistically easier than organizing a move. The costs and logistics are borne by staff, not the Agency.
Embracing remote work at the federal level will help entrench remote work as a new mode of organizing business in general. As more firms adopt a remote-first orientation, geographic inequality will be further reduced.
Data from the BLS suggests approximately 40 percent of federal workers were working at home in September, and a survey of remote workers from the same month found that slightly over half agreed that they could perform their work remotely with minimal or no disruption. Taking these estimates seriously suggests 20 percent of federal jobs can already be performed remotely. Given that the federal government has consistently had more remote workers than the national average, this estimate is likely conservative: a survey from Upwork of 1,000 hiring managers found they were planning an average of 22.9 percent workers fully remote in the long-run.
Looking only at the 400,000 federal workers based in D.C., Maryland, and Virginia, 20 percent equals 80,000 workers. For comparison, a 2019 Brookings report about the potential economic development benefits of relocating federal agencies listed 19 greater D.C.-based agencies and sub-agencies as potentially able to be relocated. They collectively employ a similar number in the same three states: 89,000 workers. But remote work would also be available to the federal government’s other 1.4mn US-based federal workers, many of whom are also based in expensive urban centers.
Addressing Some Potential Fears of Remote and Distributed Work
Like any policy change, dispersing the federal workforce may entail some costs as well as benefits. In this section, we address two major concerns and conclude they are not significant enough to outweigh the benefits discussed above.
Does Remote Work Really Work?
A primary reason that remote work was not more widespread prior to Covid-19 was a perception that it was not as productive as a traditional office. Even if this was true, it would not necessarily mean remote work is undesirable, since any disadvantages associated with productivity might be more than offset by cost savings and access to a larger labor market. Fortunately, for a wide variety of job types, no such trade-off is necessary: for many positions, remote work appears to be just as productive as traditional office-based work.
A review of the economic literature about the efficacy of remote work prior to Covid-19 found little evidence that it results in any reduction in worker productivity for a wide variety of positions. Indeed, plenty of evidence —including a particularly relevant study from the US Patent and Trademark Office’s work-from-anywhere program —found remote workers were more productive than those in a traditional office environment. The fact that modern remote work is productive is the likely explanation for the steady rise of full-time working from home before Covid-19 from under 3 percent to 5 percent over 1980 to 2018 (with a marked acceleration after 2010). Even 5 percent understates the true extent of remote work prior to Covid-19, since it excludes work away from both the home and the office, such as in coworking spaces. Including these raises the share of full-time remote workers prior to Covid-19 to 10 percent. Even without Covid-19, businesses were (slowly) learning that remote work worked.
Extensive experience with remote work during Covid-19 has accelerated that process. It is now clear that in a wide variety of contexts, there really is no question that remote work can be at least as productive as traditional work. A number of high-profile companies have made the switch to permanent remote work after several months of experience with it (e.g., Microsoft, Facebook, Twitter). This is not limited to a few anecdotes either; in a survey of 1,000 hiring managers by Upwork, 60 percent planned to increase their use of remote work in the future, as a result of their experience with Covid-19.
Within the federal government, experience has also been broadly positive as workers gained experience. Whereas an April poll of federal workers working remotely found just 15 percent reporting minimal or no disruption due to the shift to remote work, a follow-up poll in September saw this number rise to 53 percent. A November survey of managers at the Department of Transportation found 55 percent of units were more productive during the pandemic than before.
Systematic evidence on the longer-term viability of remote work is unfortunately limited at the moment. While there are examples of organizations that have successfully organized in a distributed manner for many years (the USPTO has had a work-from-anywhere program since 2012, WordPress since 2005), any evidence about the long-term efficacy of remote work necessarily predates the recent transition to remote work due to Covid-19. It may be that longer term challenges to successful remote work will yet emerge. At the same time, it is likely that new organizational and technological solutions will emerge (indeed, the number of patent applications related to remote work technology has increased dramatically since February 2020), so that remote work is just as likely to function better in the long run than in the short run. The experience of remote work is also likely to improve once widespread vaccination allows children to return to full time childcare and social gatherings outside of work are viable.
Nonetheless, given long run uncertainty one possibility would be to implement a multi-year trial for remote work. To realize most of the benefits of remote work, such a trial needs to be sufficiently long, because if workers feel they will be required to return to a D.C. office in the near term, they will be unwilling to relocate. As an example, the U.S. Patent and Trademark Office’s work-from-anywhere program began as a five-year pilot program in 2017.
Benefits of Agglomeration
Another critique of remote work focuses not on the level of individual workers and businesses, but on the broader ecosystems in which they operate. Physically clustering a large number of workers in a particular industry has traditionally led to at least two major benefits: more efficient matching of workers to positions, and learning. One concern may be that these benefits will be lost if an organization goes remote, even though at the level of individual workers productivity is unaffected. Fortunately, the internet and cheaper travel has significantly eroded both of these advantages of physical proximity.
First, clustering workers together can make it easier to match the right worker with the right job. Physical proximity makes it easier to share information and form informal social networks (which can be just as important for helping people find jobs that are good fits). While these effects no doubt continue to exist, their relevance may be fading with the advent of online job markets, the use of algorithms for matching workers to jobs, and the growth of online social networks (which allow people to maintain geographically distributed networks of informal friends).
Second, economists frequently point to learning via “local knowledge spillovers” as another reason why organizations choose to cluster together. A variety of evidence shows innovative businesses learn from each other, borrowing and improving on the ideas and inventions of their neighbors. But here too, there is a lot of evidence that these effects are shrinking —possibly to the point of irrelevance in some sectors — as the internet and cheap travel makes it no longer necessary to physically reside near each other to learn from each other.
Moreover, it is unclear if these kinds of knowledge spillovers are relevant in the context of the federal government. Furthermore, while keeping the majority of federal employees clustered together in Washington, D.C. makes it easy for them to share knowledge with each other, it makes it harder to learn from the policies and processes of 50 state governments and thousands of local ones.
In sum, it is true that a more distributed federal workforce might find it benefits less from matching and learning than it would if it remained in D.C. But, at a minimum, the internet and cheaper travel have eroded the importance of these factors. And for learning, it may in fact be the case that a more distributed government would benefit more from learning than one clustered in DC. At any rate, the challenges associated with remote work are likely smaller than they have ever been, while the benefits remain as large as ever.
Conclusion
The Covid-19 pandemic has shown us that for many more positions than previously suspected, remote work has come of age. It is now possible for a significant share (perhaps 20 percent) of federal positions to be done effectively by a distributed workforce of full-time remote workers residing where they choose. Moving the federal workforce in this direction would have myriad advantages. It would make working for the federal government more attractive, both by giving workers the autonomy to work in the place and manner they prefer, and by potentially allowing for increased real wages for workers who choose to live in places with a lower cost of living. Combined with access to a larger national labor market, this would facilitate hiring and retaining quality employees. This is especially important given the expected retirement wave that will come in the years ahead. A more distributed federal workforce would also likely lead to lower costs for the government, in terms of office space and possibly wages. It may also benefit workers who continue to reside in Washington, D.C., through its beneficial impact on congestion and property prices. Lastly, a more distributed workforce would be a tool for economic development of lagging regions and allow the government to better achieve its goal of hiring a workforce that is representative of the population it governs.
For all these reasons, the government should give current workers the choice to continue to work remotely full-time if they were able to perform their job effectively during the crisis. Going forward, the government should start with the assumption that new positions will offer workers the same choice, opening up federal positions to people living anywhere in the country.
Acknowledgments: Matt Clancy wishes to thank Nicholas Rada for a conversation that sparked this piece.
ABOUT THE AUTHORS:
Matt Clancy is a progress studies fellow (Emergent Ventures) and assistant teaching professor at Iowa State University, and formerly a research economist on science policy for the USDA. He is the author of The Case for Remote Work. He currently lives in Des Moines, Iowa.
Adam Ozimek is the chief economist at Upwork, the world’s work marketplace, where he leads research on labor market trends. Upwork encourages remote work for the private sector but has no contracts with the federal government.
The presidential election is over, but for progressives, the process of winning back the working class has just begun.
In this note we’re going to focus on beer. Why beer? First, brewery employment is one of the great success stories in manufacturing in recent years. The number of jobs in the brewery industry increased a stunning 230% from 2007 to the pre-pandemic peak of 2019, making breweries the fastest growing manufacturing industry. With many communities—including the “Blue Wall” states—still traumatized by the long-term collapse in manufacturing jobs, the symbolic and actual importance of the health of the brewery industry, especially craft brewers, cannot be underestimated.
Second, beer exemplifies the complicatedpolitical calculation that progressives must make about tax policy. The Tax Cut and Jobs Act of 2017 (TCJA) gashed a huge hole in federal revenues that eventually needs to be plugged. Yet some provisions of the TCJA, such as the excise tax cuts for brewers, have been successful in generating job growth, and deserve to be made permanent.
Third, progressives need to face the regressive and almost punitive nature of excise taxes ingeneral. It’s difficult to build political supportwhen ordinary people feel like they are being nickeled and dimed by taxes and fees that they cannot get away from, whether it’s on beer, telephone service or some other essential product.
BREWERIES AND MANUFACTURING
Let’s start with manufacturing. The demise of many manufacturing jobs left painful scars in many state economies, wounds that were never fully healed under the Trump administration. As of 2019, before the pandemic hit, manufacturing employment in 40 out of 50 states was still below their 2007 level. In particular, the Blue Wall states—Minnesota, Michigan, Wisconsin, and Pennsylvania—were still down 114,000 manufacturing jobs in 2019 compared to 2007.
Against this dismal backdrop, the brewery industry has been a remarkably positive story. As noted, nationally brewer employment has shown the fastest growth of any manufacturing industry between the business cycle peaks of 2007 and 2019. In the Blue Wall states, brewery jobs quadrupled over this stretch, going from 3,000 in 2007 to more than 12,000 in 2019 (Figure 1).
The importance of brewery jobs stands out when we look at the most recent years. From 2015 to 2019, brewery industry jobs rose by an astonishing 79 percent. As Table 1 shows, that makes brewing the second-fastest growing manufacturing industry by jobs over that stretch, second only to storage battery manufacturing (think Tesla and Elon Musk’s huge Gigafactory in Sparks, Nevada, which employs thousands of workers making lithium-ion batteries).
It’s worth noting that the brewery industry is in good company. Other top manufacturing industries in terms of job growth include military armored vehicles, semiconductor machinery and space vehicle propulsion units (another industry related to Musk).
Table 1. Top Manufacturing Industries by Growth, 2015-2019
Data: Bureau of Labor Statistics
TAXES AND JOBS
Brewery employment was boosted, in part, by the “Craft Beverage Modernization and Tax Reform” provisions of the TCJA. These provisions, due to expire on December 31, 2020, reduce federal excise taxes on both large and small domestic breweries. The excise tax rate is reduced on the first six million barrels brewed by any brewer.Small brewers, with less than two million barrels, get a deeper reduction on their first60,000 barrels.
Economic research suggests that these excise tax cuts are mostly passed onto the final consumer. Indeed, the price of beer rose
at only a 1.7 percent rate between 2016 and 2019, slower than the 2.1 percent rate of overallconsumer inflation during the same period. Inother words, beer has been getting relatively cheaper compared to other goods and services.
Should the excise tax reduction be extended? On the one hand, the federal government entered the post-election period with a $3.1 trillion federalbudget deficit for FY 2020, and the public holdingfederal debt equal to 100 percent of GDP. Under normal circumstances that would be seen as an opportunity to raise revenues by allowing the provisions to expire, immediately sending excise taxes on small brewers soaring.
Yet, with the pandemic on the upswing across the country and unemployment still high, the notion of raising taxes on an extremely successful job-creating industry seems misguided, at best. That’s the equivalent of removing a tire from your fastest, most reliable car in the biggest race of the year.
One political hurdle is that the excise tax reduction was originally enacted as part of the TCJA, which has a bad association among many progressives for its top-heavy individual rate cuts and large reductions in corporate income tax rates. Nevertheless, the TCJA contained some important progressive provisions, such as improvements in the U.S. international tax code that make it harder for multinationals to shift income to low-tax countries (the so-called BEAT, or “base erosion and anti-abuse tax”) and set a kind of minimum tax on multinationals (the so-called GILTI or tax on “global intangible low- taxed income”). Within this context, the lower excise tax on beer translates directly into lower prices for consumers and more manufacturing jobs for workers, a general plus. Indeed, the Craft Beverage Modernization and Tax Reform Act had strong bipartisan support when it was first introduced in 2017 and extending the current provisions has strong bipartisan support today.
Figure 1. Soaring Brewery Jobs in the “Blue Wall” States, 2007=1
*Michigan, Minnesota, Wisconsin, Pennsylvania, Data: Bureau of Labor Statistics
THE CASE AGAINST EXCISE TAXES
The next question: Should the excise tax reduction on beer not only be extended, but made permanent? To answer that question requires a discussion of the role of excise taxes in fiscal policy. It’s a general principle ofeconomics that broad-based taxes are moreefficient and less distortionary than a narrowexcise tax on a single good. So, a broad sales tax or value-added tax is better for the economy and economic growth than a narrow excise tax which raises the same amount of money. Similarly, a broad carbon tax is better, in a theoretical sense, than a narrow tax on gasoline.
Nevertheless, excise taxes persist. Generally, excise taxes have been justified on two grounds.First, they serve the purpose of use fees, as in the case of the gas tax, which is used to pay for highway maintenance. But in an era of electric vehicles and oversize trucks, there no longer is a direct link between gas taxes paid and damage to the roads.
Excise taxes have been also justified on social grounds, both negative and positive. The tobacco excise tax, of course, is intended to discourage smoking. Telephone companies pay a contribution to the federal government—effectively an excise tax—to support universal service initiatives. And of course, the excise tax on alcohol has been tied to the social costs of alcohol abuse.
However, there are downsides to the use of excise taxes for any of these purposes. First, excise taxes tend to be regressive. A 2019 analysis by the Tax Policy Center showed that low-income households pay 1.1 percent of their income in federal excise taxes, compared to 0.5 percent for high income households (Table 2).
Table 2. Distribution of Federal Excise Taxes, 2019
*includes alcohol excise tax. Data: Tax Policy Center https://www.taxpolicycenter.org/briefing-book/who-bears-burden-federal-excise-taxes
In terms of alcohol, a 2015 study from the Congressional Research Service noted that excise taxes are generally regressive, alcohol included. Lower income households tend to spend a higher share of their pre- tax income on alcoholic beverages, but this distribution is not as uneven as spending on non-alcoholic beverages or food. In particular, economic studies have shown that beer is much less responsive to price changes than either wine or distilled spirits. This means that excise taxes on beer are much more likely to be transmitted to consumers, which puts more of a burden on low-income consumers. That makes the beer tax regressive.
And then there’s one more issue that’s especially important politically at this moment. A narrowly focused excise tax is perceived by many Americans as direct government interference in their choices. From the progressive perspective, that power should be used judiciously and notwith profligate abandon. That suggests as ageneral principle, we should move away from excise taxes towards broader-based taxes.
That principle obviously has wide applications. But getting back to beer, which is where we started: It’s time to get rid of the temptation to “tax sin” and let the excise tax reductions on beer be permanent. The U.S. needs more tax revenue, but it has to come from broader based taxes.
For Americans and much of the world, 2020 has been an annus horribilis. To contain the coronavirus 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. A quarter of the 20 million people the virus has infected globally are American, and at 165,000, our death toll is by far the world’s largest.
The plague has 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 as many as one in six (about 25 million) remain out of full-time work.
Amid this unprecedented public health and economic crisis an old American dilemma – racial injustice – has reared its head. The senseless killings of George Floyd, Breonna Taylor and other Black Americans by police has triggered widespread public outrage and sometimes violent protests.
Intensifying all three of these shocks is a catastrophic failure of national leadership. In America’s past tribulations, extraordinary leaders have arisen to steer our republic through the storm. Not this time. President Trump has run the ship of state aground.
His incompetent handling of COVID-19 has prolonged the pandemic and pushed our economy to the brink of collapse. As demonstrations against police brutality and racial discrimination tear at the nation’s social fabric, Trump has displayed a perverse talent for inciting social rancor and pitting Americans against each other.
Now, with a crucial national election approaching this fall, 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.
No wonder Americans’ nerves are frayed. The impression grows, here and abroad, that our country is becoming a failed state.
But that’s wrong. The United States remains a resourceful and dynamic country capable of swift course corrections. Time and again, we’ve showed that a free people can bounce back from adversity stronger than before. Now it’s time to reinvent ourselves again.
Summer is normally a time when Americans look forward to taking a vacation. In the pandemic summer of 2020, however, many of us probably would like nothing better than to get back to work.
Since the coronavirus reached our shores, tens of millions of Americans have been laid off or furloughed. Many others have had their hours reduced or their pay cut; have been prevented from plying their trade by stay-at-home orders; and, have stood by helplessly as businesses they built went under. Schools closings have compounded parents’ ordeal, since it’s hard to work or look for a job when you are taking care of kids at home.
More than 51 million Americans – almost one third of the nation’s workforce — have filed for unemployment since the pandemic began. In June, the official unemployment rate was 11.1 percent, which translates into nearly 18 million people out of work.
These figures don’t take into account the summer surge that has pushed Covid-19 infection rates to record heights in 39 states across the South, West and Midwest. Sunbelt Governors who heeded President Trump’s premature calls to “reopen” have closed bars, gyms and beaches to stem the spike in infections and prevent hospitals from being overwhelmed.
The longer the pandemic rages, the deeper the damage to a U.S. economy that remains largely locked down. So far, about three million small businesses have shut their doors for good. Many large companies also have announced sharp workforce reductions.
It’s estimated that at least 3.7 million Americans no longer have jobs to go back to. “It’s clear that the pandemic is doing some fundamental damage to the job market,” said Mark Zandi of Moody’s Analytics. “A lot of the jobs lost aren’t coming back any time soon.”
The economic pain inflicted by Covid-19 has not been distributed evenly. Hit hardest have been workers in retail, personal services, restaurants and hotels, entertainment and sports and manufacturing. Job losses are disproportionately high among low-income, black and Latinx workers.
Working Americans have made tremendous sacrifices to help the country contain an unusually infectious and deadly virus. Our country owes them an all-hands-on deck push to get everyone back to work as soon as conditions allow – and at a decent living wage.
What’s needed is a robustly funded national reemployment drive in which the federal, state and local governments work in tandem with the private sector to match displaced workers to openings in fast-growing sectors; acquire the skills they need to switch careers; and, lower obstacles to starting new businesses to replace those we’ve lost.
This initiative also should take aim at the low-wage trap in which many less educated U.S. workers are caught. Raising the minimum wage is necessary but insufficient to reverse decades of growing wage inequality. The reemployment campaign must also include new ways to lift the pay and career prospects of blue collar workers who have fallen out of the middle class.
Ideas for stimulating entrepreneurship appear elsewhere in this report. This section proposes three big initiatives for connecting displaced workers to new jobs and careers, and for making work play.
First, increase apprenticeship in America ten-fold.
The United States lags other advanced countries when it comes to apprenticeship and other “active labor market” policies to facilitate the rapid reemployment of laid-off workers. Yet research shows that workers reap significant financial gains from apprenticeship, which usually combines on-the-job training and classroom instruction. In fact, the gains surpass those from other alternatives, including completing a degree at a community college.
Employers also benefit too. Their recruitment and training costs decline and their ability to add skilled workers rapidly improves. They also report higher worker productivity and morale.
Since apprenticeship clearly is a “win-win,” it’s puzzling that there are only about 440,000 registered apprentices in the United States. The Urban Institute’s Robert Lerman, the nation’s leading scholar of apprenticeship, notes that if we aimed at creating as many apprenticeships as a share of our labor force as Britain, Australia or Canada, that number would climb to around four million, or nearly 10 times higher.
Facing the challenge of getting millions of displaced workers into new jobs as quickly as possible, as well as finding slots for first-time workers whose entry into the labor markets has been delayed by the shutdown, America should go big on apprenticeship. This will also make U.S. labor markets more resilient against future economic downturns.
U.S. lawmakers should create strong incentives for intermediaries (private or public) to organize apprenticeship training and placement and market them to employers. Lerman estimates the cost of stimulating 900,000 new participants in rigorous apprenticeship at $3.15 billion a year. Since most of the occupational training would happen at worksites, at no public cost, the government would pay only for off-site classroom instruction and training in “soft skills.” From the taxpayers’ perspective, apprenticeship is a bargain compared to the cost of subsidizing full-time attendance at community colleges.
Another way to scale up is to tap the growing number of private intermediaries that compete to supply employers with skilled and reliable workers.
There are thousands of private firms and non-profits that are well positioned to supply purpose-trained talent to their clients. Many are already providing services to dozens or hundreds of clients in sectors facing talent shortages, notably technology or healthcare. Ryan Craig, an investor and writer, notes that these business services companies can become a vector for new talent by bridging the crucial “last mile” between educational institutions and employers. In what Craig calls an “outsourced apprenticeship,” they hire laid-off and entry level workers and train them with an eye toward the occupational and soft skills required by specific companies. The intermediaries incur the training expense and get paid only when they succeed in placing their apprentices in full-time jobs. In so doing, they can create frictionless pathways to good first jobs.
The federal government can stimulate the growth of this competitive market with “pay for performance” awards financed by shifting funding from higher education (especially community colleges). Private intermediaries would get paid for each placement when they hire candidates who meet certain criteria (such as eligibility for Pell grants), provide them with an apprenticeship that pays minimum wage, train them and place them in permanent positions.
Even with a quite low unemployment rate before the virus struck, the U.S. economy suffered from a dearth of skilled workers. This “skills gap” left more than seven million jobs unfilled. When you add to that the millions of workers whose previous jobs vanished in the pandemic, it’s clear that our country faces an enormous reskilling and upskilling challenge.
A national reemployment initiative therefore must expand access to high-quality career education and training. Yet federal policy tilts heavily in favor of aid for college-bound youth, while providing far less support for the majority of young Americans (69 percent) who don’t get college degrees.
Many of the jobs that define the skills gap are positions that require specialized occupational training or education but not a four-year degree. More than half of U.S. jobs, in fact, are “middle skill” jobs in such fields as cybersecurity, welding and machining, truck driving and home health. They often require a certificate, license or other industry recognized credential.
Yet federal financial aid for career education and training is a pittance. In 2016, Washington spent more than $139 billion on post-secondary education, including loans, grants and other financial aid for students. Of that, just $19 billion went toward occupational education and training.
Demands from Sen. Bernie Sanders and others for “free college” would compound this inequity, showering new benefits on college-bound youth at the expense of working families whose children don’t go to college. Instead, as a simple matter of equity, Washington should invest a roughly equal amount to expand access to high-quality career education and training for young workers who need post-secondary credentials but not a four-year degree.
Third, create a new “Living Wage Credit” to make work pay.
A national reemployment drive should also aim at reversing the decades-long trend toward wage stagnation and diminished job prospects for working Americans without college degrees. This dynamic is shrinking America’s middle class and creating a new class divide along educational lines.
Our economy’s seeming inability to generate decent family wages for non-college workers – along with unfounded fears that robots
are making many workers superfluous — has triggered calls on the left for guaranteed government jobs or income.
Pragmatic progressives ought to avoid statist solutions and instead offer direct support for low-wage workers. By raising the minimum wage and instituting a new “Living Wage Credit,” our country can ensure that all full-time workers earn enough to support a middle class lifestyle.
Inspired by the success of the Earned Income Tax Credit (EITC), the Living Wage Credit would function as both an incentive and reward for work. It builds upon similar proposals by Tax Policy Center’s Elaine Maag, and the Brooking Institute’s Belle Sawhill.
Sawhill’s version, for example, would give all U.S. workers a 15 percent raise up to some annual ceiling ($1,500). The tax credit, essentially an offset to the payroll tax cut, would phase out as earnings rise past $40,000 a year. Unlike the EITC, the Living Wage Credit would be based on an individual workers’ income, not household income.
PPI’s more ambitious Living Wage Credit absorbs the EITC, provides more generous tax relief and offsets the cost with a new national tax on consumption or value-added tax (VAT). In the absence of a VAT, however, the costs of a stand-alone credit for workers above the EITC cutoff could be defrayed by taxing the unearned incomes of wealthy Americans.
For example, a “tax wealth, not work” package could include higher rates on top earners; equalizing capital gains and personal tax rates; and, replacing the current estate tax, which the 2017 Trump-GOP tax bill cut dramatically for the wealthiest heirs, with a progressive inheritance tax (as proposed last year by PPI).
The “gig economy” has unlocked a wave of economic value in recent years. The direct impact of independent workers on the economy is almost $1 trillion, or 5% of GDP. Now, this extremely flexible segment of the economy is more important than ever in the midst of the COVID-19 pandemic. Surprisingly, even the healthcare industry has been laying off workers, as patients defer elective surgeries and postpone non-urgent care.
The gig economy has been a rare bright spot during a dark time for the U.S. economy. Since the shutdowns began in mid-March, more than 44 million Americans have filed for state unemployment benefits. Fortunately, platforms for independent workers have been able to pick up some of the slack. Instacart has hired 300,000 new workers and plans to hire 250,000 more. Target’s Shipt added 100,000 workers. Doordash and Amazon Flex are also seeing a surge in signups by workers. Part of the reason for this uptick is that gig workers often perform tasks that enable social distancing for others such as food or package delivery. Platforms that facilitate these transactions are also one of the only ways newly laid off workers can earn income during the crisis, bypassing strenuous hiring processes or the need to learn new skills. These flexible work arrangements can benefit society by swiftly shifting labor out of dormant sectors and into in-demand sectors.
For many workers, these new gig economy jobs will be temporary, serving as a lifeline during a difficult time. For others — and for the millions who were already independent workers — these new jobs might become permanent. While these jobs are certainly much needed during these times, a key inequity from before the pandemic remains: independent workers don’t receive the same benefits as employees. This is due to two factors. First, businesses generally prefer working with independent contractors as opposed to hiring employees because there are fewer rules and regulations associated with independent workers and therefore lower costs. Second, the tax code is biased against independent workers. Employee benefits tend to be untaxed, while independent workers must purchase benefits on their own using post-tax income.
So the critical question becomes: How can we help workers in these jobs get the benefits they need and deserve while maintaining the flexibility that traditional employment arrangements can’t offer and that independent workers value so dearly — and that have helped make our labor markets more supple and resilient during the present crisis?
As part of its disaster relief, Congress augmented regular unemployment benefits under the Pandemic Unemployment Assistance (PUA) program, including self-employed workers who had previously been excluded from receiving UI benefits. Including independent workers in this stimulus measure makes sense even from the logic of the unemployment system: Across the business cycle, the unemployment system already pays out more in benefits to workers than it receives in UI taxes. The system is designed to be an automatic stabilizer and Congress regularly increases outlays as a first line of defense in a recession.
Traditionally, workers have been sorted into two categories: employees and independent contractors. Gig workers are most often classified as independent contractors. Some progressives are calling for a change to the laws so that gig workers become employees.
This shift could undermine many of the benefits involved in freelancing by imposing costs, rules, and regulations associated with employment that undermine the autonomy independent workers currently enjoy. It’s no surprise that in surveys gig workers overwhelmingly say they don’t want to be reclassified as employees.
Nonetheless, that doesn’t mean they don’t want and deserve basic protections and benefits employees have. The current distinction between employees and independent workers is outdated and ill-suited to the 21st century digital economy. However, that didn’t stop California’s legislature from doubling down on the old model, passing AB-5 last September which effectively reclassified most independent workers as employees. The predictable result: independent workers in California 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, its parent company, Vox Media, laid off 200 freelance writers right before the holidays (and right before the law went into effect on January 1).
It is time to update the U.S. tax code, which is biased toward employees and against independent contractors. According to the Bureau of Labor Statistics, total benefits are more than 30% of hourly compensation for private sector employees. If businesses try to give independent workers benefits, that’s taken as prima facie evidence that those workers are actually employees and the associated regulations apply to them. And most of these benefits are tax-advantaged: retirement and savings, insurance (life, health, short-term, and long-term disability), paid leave, workers compensation, and unemployment benefits.
But it’s important to note: all else equal, that this plan to extend tax-preferred benefits to independent workers wouldn’t cost taxpayers any more in lost tax revenue than converting all independent workers into employees because the benefits would be untaxed in both cases. In other words, if a federal version of AB-5 were to be implemented, independent workers that become employees in that scenario would also receive tax-advantaged benefits.
A new tax and regulatory regime that solves this inequity would have several important features:
• It should equalize the tax treatment of benefits so that independent workers are on a level playing field with employees.
• It should 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 should have a uniform national standard for determining who is an independent worker. For example, one possibility is that companies would have minimal control over hours of work, and no non-compete agreements
Here’s how it would work. Companies would pay a certain share of the worker’s earnings into a dedicated account for pre-tax benefits. There would be no required match from the beneficiary. The independent contractor would accrue benefits in proportion to the amount of money he or she earned on the platform. 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.
If a company opts-in to this alternative classification — which we call “gig workers with benefits” — then once a worker reached a certain number of hours contracting with them, that 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 also should be covered by occupational accident insurance for on-the-job injuries.
On the other hand, companies that opt-in to this new regulatory framework would be required to give workers the freedom to choose their hours as well as work for other companies in the same industry. In effect, this would give employers minimal control over hours or non-compete agreements.
Companies would be required to choose, on
a year by year basis, whether they apply this new category of worker to their independent contractors. Companies are incentivized to opt-in because the benefits independent workers receive under this model are tax-advantaged. On the margin, independent workers will choose to work with companies that offer these benefits because they are worth more than pure cash compensation (which is subject to payroll and income taxes).
This new category for independent workers would come with some of the costs of regular employment, but many companies would likely still choose this option over hiring employees because their business model depends on flexible, on-demand workers. For example, a ride-hailing company would likely not be able to comply with minimum wage and overtime laws if workers set their own hours, as there would be no way to ensure that workers don’t “clock-in” during off-peak demand to sit idly and collect the minimum wage and overtime. The “gig workers with benefits” category, on the other hand, enables companies to maintain their flexible approach to engaging gig workers, without compromising the independence that the workers themselves value highly. If this flexibility went away, workers would demand more cash compensation to compensate for needing to work a rigid schedule.
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 equal footing with the tax-advantaged employee benefits.
America’s gig workers deserve greater economic security but eliminating their jobs or undermining the autonomy of workers who need flexibility in their employment isn’t the right way to achieve that goal. Leveling the playing field to ensure independent workers and employees receive the same tax treatment on their benefits is the better path forward.
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.
Zillow CEO Rich Barton recently tweeted that he was giving all employees the option to work from home for the rest of 2020. “My personal opinions about WFH (work from home) have been turned upside down over the past 2 months. I expect this will have a lasting influence on the future of work … and home.”
Barton’s epiphany about working from home – echoed by other U.S. business leaders – may mark a decisive shift toward pervasive telework in the post-pandemic economy. Before COVID-19 appeared, just five percent of the U.S. workforce worked remotely full-time. Now, thanks to America’s extensive digital infrastructure, two-thirds of employees are working from home.
Some companies say they have witnessed an immediate bump in productivity as workers save time on commuting and have fewer in-office distractions. The temporary switch to remote work has gone so well at Twitter that the company has decided to make it the permanent default for most employees. Other tech companies may soon follow suit.
But before too many companies go all in on work from home, there is an important reason for caution: the current increase in productivity may be an illusion.
DRAWING DOWN ON ORGANIZATIONAL CAPITAL — NETWORKS, CULTURE, AND PROCESS
Even as they work from home, employees are leveraging the relationships, routines, and habits they developed from interacting with coworkers in person on a daily basis. Over time, however, as workers begin drawing down on this social and organizational capital — culture, structure, and processes — we may find that they become less productive as collegial networks and opportunities to acquire new skills erode. Ironically, the demographic that most identifies with telework — millennials — would likely be most harmed over the long run, since more senior employees typically have a deeper reservoir of institutional and professional knowledge.
As employees switch jobs, problems linked to the withering of collegial relationships may start to seem more obvious. Eventually, companies will have trouble hiring the right people and integrating them into a cohesive team.
The Federal Reserve Bank of St. Louis took a closer look at this phenomenon and found that professional networks are, indeed, central to the career advancement. In a 2016 paper titled “Network Search: Climbing the Job Ladder Faster“, the authors found that “…jobs found through a worker’s network have (i) higher wages and (ii) longer employment duration and (iii) workers experience shorter unemployment spells.”
EVERYONE’S DOING IT RIGHT NOW. BUT FOR HOW LONG?
Work from home also faces a systemic collective action problem — when every company does it, then it’s easier for each company to do it. That dynamic is a tailwind right now because so many workers are telecommuting. But as some companies start to revert to their previous policies, it will quickly become a headwind.
These things are extremely difficult to quantify but they must be important. Otherwise, companies wouldn’t invest heavily in offices and travel aimed at building personal and professional relationships and trust. For any kind of creative work, the serendipity of sharing ideas in informal and unscheduled collaboration is crucial.
It seems unlikely that all this sunken investment in office culture and relationships is irrelevant, as the newfound enthusiasm for telework often implies. What’s more, we’ve seen spurts of interest in telework come and go.
It wasn’t so long ago that the trends in corporate America were moving away from work from home. In 2013, newly installed Yahoo! CEO Marissa Mayer ended the company’s work-from-home option, forcing several hundred employees to either move to the nearest office or quit. In the next few years, IBM, Bank of America, Best Buy, and Aetna followed suit.
COVID-19 WON’T BE THE LAST DISASTER TO FORCE WFH
But Mayer’s all-or-nothing approach doesn’t seem quite right either. It’s time to think about making work more resilient against unforeseen catastrophes like COVID-19. Central to that thinking is finding the optimal balance between office work and work from home for white-collar employees.
For instance, periodic telework commits individuals to exercise their “remote work environment”. This forces employees to spot-check necessities such as network compatibility and hardware and software updates, which can be essential to business continuity and resiliency planning in the event of emergencies suddenly dictating work from home.
Additionally, organizations need to address the increased cybersecurity risks associated with a remote work force, which provides new opportunities for sophisticated attackers to insinuate themselves within a network. As Verizon Business Group CEO Tami Erwin told Reuters, “A lot of people ended up sending workers to work from home without really thinking through what were some of the security elements in the future. I think employees working from home are probably more vulnerable to attacks.”
Overall, as workers spread out, risk increases and corporate decision-making needs to respond appropriately. A challenging economic environment only compounds the difficulty in managing new risks due to work from home policies. According to a recent Moody’s investor research note, “As profits fall, strong governance will be required to ensure that any reduction in cyber security budgets does not expose issuers to increased cyber risk.”
Insurance alone cannot be the answer – legal liability precedents are still in their infancy and the entire cyber insurance offering is under defined and risky. And even if insurance does mitigate some risk, it can’t prevent negative reputational impact, harm to employees (trust, retainment, etc.), and damage to client and customer relationships.
According to one executive of a Chicago based firm that specializes in cyber security risks and responses for large corporations, “Those who started mitigating increased telework risks before Covid-19 are doing well, and those trying to play catch up are making mistakes that will be amplified due to the distributed workforce and economic pressures.” They noted that time is not the only thing lost: “It’ll cost more too.”
CONCLUSION
Remote work can include financial advantages in lower fixed costs like office space, and lower benefit outlays for commuter and daycare. Employers are even seeing a decline for lower overall worker salaries as qualified employees are willing to take less pay in exchange for telework benefits.
And the technology supporting remote work has clearly improved, especially in the last five years. The “consumerization” of enterprise software means there are finally products for telework that employees want to use, from videoconferencing, to instant messaging to new tools for managing relationships with customers. But because of heavy investments in organizational capital, companies are beginning to realize that having the right tools wasn’t the only thing holding them back from transitioning to full-time work from home earlier.
The future will likely feature a robust and variable mix of telework and office work. Companies that leap prematurely to the conclusion that their ability to prosper during the shutdown proves that the “office” is obsolete risk burning through their organizational capital, just as their rivals start to build it back up.
Many of the Democratic presidential candidates are vying to see who can be toughest on the tech sector. But here’s the paradox: New data shows that the tech boom is a major force driving down unemployment, lifting economic growth, and helping voters — precisely the people that the Democratic candidates are trying to reach.
The key here is that the economic data produced by the government is not typically presented in a form that easily shows the benefits of the tech boom. Software firms, for example, are spread across at least three different industries. Ecommerce — related activities are spread across at least two industries, electronic shopping and warehousing. And telecom includes at least two three industries, telecom services, communications equipment, and data processing and hosting.
Corporate profits are soaring. Yet Americans’ paychecks are inching upward by comparison. It’s no wonder many Americans feel anxious despite an economy that, by the numbers, is booming.
This disconnect between shareholders’ prosperity and workers’ precarity has led many on the progressive left to question the very future of capitalism. Some 2020 presidential candidates, such as Sens. Elizabeth Warren and Bernie Sanders, now routinely paint Big Business as the enemy of middle-class mobility and have called for drastic measures to rein in corporate power and mandate better behavior.
It might be too soon, however, to write off U.S. companies as a force for good.
Republicans despise federal micromanagement, but that hasn’t kept Rep. Don Young of Alaska from hopping aboard the Washington-Knows-Best Express. He recently introduced a bill mandating that freight trains have a minimum of two crew members on board trains at all times.
While Young justifies his bill on safety grounds, the bill also appears to reflect pressure from rail workers’ unions fearful that automation is putting their members out of jobs.
Here’s the backstory: Following the fatal 2008 Chatsworth train collision in Los Angeles, President Bush signed the Rail Safety Improvement Act into law. The law required freight railroads, by the end of 2020, to integrate Positive Train Control (PTC) — a nationwide system of technologies that constantly process thousands of data points to stop a train before human error-caused accidents occur. One of the benefits of PTC was that it was a win-win for consumers and the railroads, enhancing safety and allowing railroads to boost productivity by moving to one-person crews somewhere down the road.
For many, becoming a small business owner has always been a part of the American Dream and for entrepreneurs launching a successful startup today is, in many ways, the 21st-century version of this ambition. But even if the business gets off the ground, it is becoming more and more challenging for company owners to scale up.
To put it in perspective, “young” businesses — 6 to 10 years — were half as likely to employ 1,000 workers or more in 2014 compared to 20 years ago. That’s based on an analysis of Census Bureau data in research released this month from the Progressive Policy Institute and Allied for Startups.
Large companies have been blamed for acquiring small companies before they can grow. However, there’s another explanation for the scaling-up trap that deserves more attention: the unintentional tax and regulatory cliff created by decades of policies favoring small businesses.
In the United States, small businesses are often exempt from obligations to provide certain employee benefits and comply with certain regulatory rules if the company is small enough. While these “carve-outs” are beneficial for companies who stay below the relevant thresholds, the threat of losing these exemptions can make entrepreneurs think twice before expanding. In fact, sometimes, selling small businesses to larger rivals is more lucrative for owners than scaling their own businesses.
Starting a new business is hard. Scaling it up to a significant size is harder. Europeans have long fretted about their lack of ‘unicorns’— privately held startups with a valuation of more than $1 billion. More generally, there is a sense that European startups either fail to grow or are bought out by larger companies before they go public or create a significant number of new jobs.
A January 2019 analysis by CB Insights showed only 33 European unicorn companies, compared to 83 in China and 150 in the United States. For example, SoundCloud, an online audio platform, was founded in 2007 in Stockholm and later moved to Berlin. By 2016, it was valued around $700 million, and at one point sought a $1 billion valuation to be sold. However, by 2017, the company was on the verge of bankruptcy, abruptly fired 40 percent of its staff, and closed two offices. By August 2017, the company was valued at just $150 million. Or consider restaurant delivery firm Take Eat Easy, founded in Brussels in 2012. After a year, the company expanded to Paris and raised two rounds of venture capital funding in 2015. Take Eat Easy scaled from 10 to 160 employees and from 2 to 20 cities. But in 2016 Take Eat Easy shut down, citing revenue not yet covering fixed costs and an inability to raise a third round of funding.
Even in the relatively successful United States, it seems that new companies are scaling up less frequently than they used to. The Progressive Policy Institute analyzed Census Bureau data on business dynamics over time, focusing on “young” businesses—aged 6-10 years after being founded. We found that in 2014, 0.05% of young businesses were major employers, defined as having 1,000 or more workers. That’s half the 1994 rate when 0.1% of young businesses were major employers.
Despite the low unemployment rate, productivity growth is still stuck in slow gear. Non-farm business output per hour increased by 1.3 percent from the third quarter of 2017 to the third quarter of 2018 – well below the post- war average of 2.2 percent.1 Other countries around the world are also grappling with this slowdown in productivity growth.2 Productivity growth is the primary factor in boosting wages and living standards.
The continued lack of productivity growth arises from several causes. One important issue is a growth shortfall in the amount of capital relative to the amount of labor, where capital represents investment in equipment, structures, software, and other intellectual property.
The Bureau of Labor Statistics (BLS) calculates a measure it calls “capital intensity,” which measures the services produced by capital assets relative to the number of labor hours worked in the non-farm business sector. As shown in Figure 1, capital intensity has grown much more slowly over the past 10 years than in previous 10-year periods.
There has been much debate over the reasons for this shortfall. Some have suggested that corporate managers and stock market investors have become myopic and too focused on short-run returns. Others blame excessive regulation.
But, no matter the reason for the investment shortfall, we think it’s important to identify those companies that are bucking the trend. Starting with our 2012 “Investment Heroes” report, and continuing through this report, we have focused on identifying those companies making the largest capital investments in the United States. By expanding the capital stock, these companies are helping boost productivity and wages, and creating new jobs.
The Progressive Policy Institute’s (PPI) Investment Heroes report provides an exclusive estimate of domestic capital spending for major U.S. companies. 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. That methodology, with small modifications, has been used in each year’s report since the first in 2012.
As many as 4.4 million U.S. jobs are going unfilled due to shortages of workers with the right skills. Many of these opportunities are in so-called “middle-skill” occupations, such as IT or advanced manufacturing, where workers need some sort of post-secondary credential but not a four-year degree.
Expanding access to high-quality career education and training is one way to help close this “skills gap.” Under current law, however, many students pursuing short-term career programs are ineligible for federal financial aid that could help them afford their education. Pell grants, for instance, are geared primarily toward traditional college, which means older and displaced workers – for whom college is neither practicable nor desirable – lose out. Broadening the scope of the Pell grant program to shorter-term, high-quality career education would help more Americans afford the chance to upgrade their skills and grow the number of highly trained workers U.S. businesses need.
THE CHALLENGE: THE AMERICAN ECONOMY DESPERATELY NEEDS MORE SKILLED TALENT.
For years, U.S. businesses have complained of a “skills gap” – the inability to find the right talent for the positions they are seeking to fill. Though some have questioned the existence of these shortages, new research finds that, while some lower-skilled sectors have a surfeit of workers, other industries do indeed face a real – and dire – need for skilled employees.
Healthcare, finance, and information technology are among the fields with the greatest shortages of skilled workers.
A study by the U.S. Chamber of Commerce Foundation and Burning Glass Technologies finds that as many as 4.4 million American jobs are going vacant because companies can’t find the right employees. More than 1.1 million of these openings are in healthcare, followed by business and financial operations, office and administrative support, sales, and computers and math.
Many openings are in so-called “middle-skilled” jobs that require specialized training or education but not a four-year degree.
The vast majority of in-demand positions require some sort of post-secondary education beyond high school. In fact, the economy is shedding low-skill jobs even as demand for higher-skill occupations is rising. The Georgetown Center on Education and the Workforce, for instance, estimates that as many as 6.3 million jobs for workers without a high school diploma have permanently disappeared since the recession (2).
While some of the fastest-growing occupations require advanced schooling and extensive training – such as occupational therapy, physician’s assistant, and nurse practitioner – many well-paying jobs don’t require a four-year degree (3). These so-called “middle-skill” jobs currently account for more than half of all U.S. jobs (4) and include such fields as cybersecurity, welding and machining, truck driving, and home health (5). These jobs might demand an associates’ degree, but, in many cases, instead require a certificate, certification, license, or other industry-recognized credential attainable without attending a traditional college.
Federal financial aid for higher education is largely unavailable for career education and training.
Despite the need for middle-skill workers, current federal policy is tilted heavily in favor of traditional college over career and occupational education. In 2016, for instance, the federal government spent more than $139 billion on post-secondary education, including loans, grants and other financial aid for students. Yet, of this amount, just $19 billion went toward career education and training (6).
THE GOAL: EXPAND AFFORDABLE ACCESS TO HIGH-QUALITY CAREER EDUCATION – ESPECIALLY FOR OLDER AND NONTRADITIONAL STUDENTS
Restrictions in federal financial aid programs – that shut out many career-focused programs – are a major source of the disparity in federal support for traditional college versus career education and training. Federal Pell grants for low-income students, for example, can be used only for credit-bearing programs offered by accredited schools that last over 600 clock hours and run at least 15 weeks (7). Many high-quality coding “boot camps,” for instance, often don’t meet this standard; nor do many other occupational courses, such as programs aimed at helping students earn a welding certification or a commercial drivers’ license.
For example, Delaware’s Zip Code Wilmington, a non-profit coding school, offers an intensive computer skills program that has helped students’ salaries jump from an average of $30,173 to $63,071. Yet, because Zip Code Wilmington is not a college or university and the coursework is only 12 weeks long, the $3,000 course is ineligible for Pell funding – which could it make it unaffordable for many students (8).
THE PLAN: BROADEN THE AVAILABILITY OF PELL GRANTS TO INCLUDE HIGH-QUALITY SHORTER-TERM CAREER EDUCATION
Congress should expand the federal Pell grant program to include high-quality career education and training programs in fields with demonstrated demand for workers. Making career education more affordable through so-called “workforce Pell” would increase the pipeline for skilled talent, thereby diminishing the “skills gap” among U.S. companies. It would also open new opportunities for older and displaced workers for whom going to college or returning to school is neither practicable nor desirable. And, given the growing recognition that higher education is a lifelong endeavor (rather than one limited to the young adult years), this shift would help modernize federal higher education policy to better suit the needs of students, workers and businesses.
One promising approach is the Jumpstart Our Businesses by Supporting Students (JOBS) Act, proposed in the 115th Congress by Senators Rob Portman (R-OH) and Tim Kaine (D-VA), which would shorten the number of course hours required for Pell eligibility to 150 clock hours over eight weeks but also require that programs lead to an industry-recognized credential and meet other requirements for quality (9). Quality safeguards would help ensure that fly-by-night credential providers cannot exploit students – helping steer students toward top-flight programs.
Growing the Pell grant program need not come at the expense of higher education funding more broadly; potential sources for funding a Pell expansion include earmarking revenues from the excise tax on large university endowments (included in the 2017 tax bill), or limiting tax-preferred 529 college savings accounts, whose benefits overwhelmingly accrue to the upper middle class (10).
Although expanding Pell grants to more career education could ultimately make the program more costly, occupational credentials are typically much cheaper to acquire than college degrees, and the ultimate return – more workers in better jobs with better wages – makes the investment worthwhile.
1) Restuccia, Dan, Bledi Taska, and Scott Bittle, Different Skills, Different Gaps, Burning Glass Technologies, 2018, available at https://www.burning-glass.com/wp-content/uploads/Skills_Gap_Different_Skills_Different_Gaps_FINAL.pdf.
2) Anthony P. Carnevale, Tamara Jayasundera and Artem Gulish, Six Million Missing Jobs: The Lingering Pain of the Great Recession, Georgetown Center on Education and the Workforce, December 2015, https://1gyhoq479ufd3yna29x7ubjn-wpengine.netdna-ssl.com/wp-content/uploads/Six-Million-Missing-Jobs.pdf.
3) Chamber of Commerce Foundation and Burning Glass Technologies.
4) National Skills Coalition, United States’ Forgotten Middle, available at https://www.nationalskillscoalition.org/resources/publications/2017-middle-skills-fact-sheets/file/United-States-MiddleSkills.pdf.
5) Burning Glass Technologies, “Which Middle Skill Jobs Will Last a Lifetime?” June 20, 2018, available at https://www.burning-glass.com/blog/which-middle-skill-jobs-will-last-lifetime/. See also Anthony P. Carnevale, Jeff Strohl, Neil Ridley, and Artem Gulish, Three
Educational Pathways to Good Jobs: High School, Middle Skills and Bachelor’s Degree, Georgetown Center on Education and the Workforce, 2018, available at https://1gyhoq479ufd3yna29x7ubjn-wpengine.netdna-ssl.com/wp-content/uploads/3ways-FR.pdf.
6) Opportunity America/AEI/Brookings Working Class Study Group, Work, Skills, Community: Restoring Opportunity for the Working Class, Opportunity America, 2018, available at https://1gyhoq479ufd3yna29x7ubjn-wpengine.netdna-ssl.com/wp-content/uploads/3ways-FR.pdf.
7) 20 U.S. Code § 1088, accessed at https://www.law.cornell.edu/uscode/text/20/1088.
8) Anne Kim, Forget free college. How about free credentials? Progressive Policy Institute, October 2017, https://www.progressivepolicy.org/wp-content/uploads/2017/10/PPI_FreeCredentials_2017.pdf.
9) Office of Sen. Tim Kaine, “Kaine, Portman Introduce Bipartisan JOBS Act to Help Workers Access Training for In-Demand Career Fields,” Jan. 25, 2017, https://www.kaine.senate.gov/press-releases/kaine-portman-introduce-bipartisan-jobs-act-to-help-workers-access-training-for-in-demand-career-fields.
